Fitch Ratings said today that the two guarantees offered under the proposed U.K. government's 2009 ABS Guaranty Scheme will likely provide additional comfort for investors from a credit and liquidity perspective.
However, the degree to which the scheme will spark new lending by improving funding conditions is uncertain as other schemes such as the Credit Guarantee Scheme currently offered by the U.K. government might result in competing funding options for eligible financial institutions.
Under the scheme, the U.K. government will guarantee the timely payment of all amounts contractually due under the issued RMBS.
This will effectively cover a credit risk above 'AAA' given the underlying rating requirement. Fitch has received feedback from investors indicating they are generally willing to take on good quality credit risk of U.K. prime RMBS.
The second guarantee attempts to mitigate extension risk, which seems to be the primary concern of investors currently as prepayment rates have dropped lower than the level at which transactions have initially been priced. Investors will have the opportunity to utilize a put option which allows them to sell RMBS back to the issuer.
Issuers will also be able to call notes after a certain date as well. Both options will backed by a government guarantee.
In order to assign 'AAA' ratings, Fitch would pay attention to transaction documentation details in particular the price at which notes would be called which might be reduced by certain principal losses on the underlying portfolio.
