The U.K. Banking Bill now being considered by the U.K. Parliament won't affect ratings of structured finance transactions and covered bond programs in the country, Fitch Ratings said last week.
Initial concerns from industry players was that the bill could undermine investors' access to the underlying assets backing their secured investments, which would ultimately drive these buysiders away from U.K. housing finance sector or from increasing their return requirements.
The bill will grant the Bank of England wide-ranging powers to make orders affecting the full or partial transfer of ownership in and/or property of failing U.K. depository institutions. The U.K. Treasury would also have power to nationalize these institutions.
"The breadth and nature of the powers in the Bill is causing concern among market participants," said Liz Jones, assistant general counsel with the legal team at Standard & Poor's. "The uncertainty this could give rise to may affect the type and level of legal comfort available for structured finance transactions involving U.K. deposit-taking institutions. There could, therefore, be rating implications for our analysis of deals up to and including the 'AAA' level involving U.K. deposit-taking institutions in any capacity."
The Arkle RMBS program from Lloyds Banking Group, the HBOS-owned Permanent and Mound RMBS master trusts, and Royal Bank of Scotland's Arran program could all be affected.
However, th rating agency believes that the U.K. government and financial authorities' commitment to the structured finance and covered bond markets make it unlikely that these bodies would exercise the powers that the act bestows upon them in a way that would materially disrupt these markets.
"The Banking Act introduces considerable legal uncertainty for U.K. structured finance transactions and covered bonds programs from U.K. financial institutions in the short term, such that even 'true sale' elements (regarding isolation of the securitized assets from the financial institution) in legal opinions could be the subject of new and extensive reservations from transaction counsel," said Stuart Jennings, risk officer for EMEA structured finance at Fitch. "However, given the authorities' stated intent and past actions, with Northern Rock and Bradford and Bingley for example, and support given by facilities such as the Special Liquidity Scheme and the regulated covered bond legal framework, it is Fitch's view that it is a remote risk that the authorities would use these powers to the detriment of either structured finance or covered bond investors."
The Bill is expected to become law when the temporary arrangement under the Banking Special Provisions Act 2008 ceases to have effect after Feb. 20.