Fitch will be reviewing its ratings on structured transactions originating from Turkish entities following its one-notch downgrade action last week of both the country's long-term foreign and local currency ratings.

After a downgrade in February, the Turkish economic scenario seems to be finding little alleviation despite designs to improve its standing. The rating on its long-term foreign currency dropped to B from B+ and its long-term local currency rating dropped to B- from B.

In a Fitch observation on Structured transactions in emerging markets (see ASR 6/25/01) it was noted that though the economic background depicted increased financial volatility, the 16 Turkish structured finance deals maintained outstanding ratings, particularly because the economic crisis was expected to have minimum effect on receivables. In certain transactions the bank's performance was strong enough to prevent credit deterioration.

Following the February crisis, for instance, the transaction, Trade Payment Rights PLC (TPR PLC), was placed on ratings watch negative; this relatively mild action was mainly a result of the credit strength of its originator, Ottoman Bank. It was also noted that the merger of the originating bank and Korfezbank and Italy's Bank Intesa's shareholding bid in Ottoman's parent company, Garanti Bank, would reinforce the deal's position.

Nonetheless, this current ratings action emphasizes the TPR's dependence on its originator. If there is any further action taken on the sovereign, Ottoman could face a negative impact, explains Dresdner Kleinwort Wasserstein in a research on the impact of the latest downgrade. Fitch has removed the ratings watch negative on both the sovereign rating and bank's rating and placed each on negative outlook.

At press time, the ratings company had not yet disclosed what effect the recent downgrade would have on the TPRs. "This is an issue we are currently discussing over the next couple of days," said a Fitch spokesman.

To date the rating action has centered on the quality of the originating bank, the history of actual flows and expected future generation. TPRs have historically met debt service coverage ratios even at their lowest point in December 1999.

Dresdner investigated several scenarios that might result from the downgrade. In a normal scenario, Ottoman would weather the crises and flows would maintain above trigger levels. However, this does not guarantee that there would be no further downgrade action on the sovereign credit. To date the growing disparity in pricing between Turkey's credit and the transaction's investment-grade ratings stresses concerns of illiquidity.

"The most recent downgrades have increased have increased the likelihood of a negative rating action on TPR PLC to triple-B minus given the seven-notch gab between the sovereign rating and transaction ration," explain analysts at Dresdner. A crisis scenario would result from an Ottoman insolvency. However, the intended merger of Ottoman and Korfezbank would help to boost TPR flows and place both the bank and transaction in credit positive standing.

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