The recent Spectrum Plus ruling poses little threat to U.K. whole business ABS, say Fitch Ratings analysts. "While overall, the ruling could impact loss given default it will not impact probability of default and therefore will not affect ratings," said Philip Walsh, senior director of European structured finance at Fitch in a teleconference last week.
The Spectrum Plus saga (see ASR 6/7/04) saw further developments at the end of June when the House of Lords decided that the chargee (Natwest) which held an English law fixed charge over the book debts could not sufficiently demonstrate that it exercised control over the assets and the proceeds thereof in the bank account. In the circumstances of the National Westminster Bank (NatWest) v Spectrum Plus case, the court therefore held that the charge was to be interpreted as floating- rather than fixed-rate - the bank did not directly control the book debts, which puts the bank behind secured and preferential creditors. As a result of the ruling, lenders will now need to consider whether they will need to obtain additional security, such as guarantees from a company's directors, in order to secure a fixed-charge status.
Fitch said that the ruling now calls into question the borrower security trustee's ability to appoint an administrative receiver; and the impact of the insertion of preferred creditors for U.K. whole business securitizations. "Fitch's whole business securitization ratings rely on the borrower security trustee's ability to appoint an administrative receiver, which arises from its holding of a qualifying floating charge," explained Walsh.
In a report to be issued later this month, Fitch said that it reviewed legal opinions to assess whether the possible re-characterization of fixed charges granted by the borrower deed of charge would jeopardize the borrower security trustee's ability to appoint an administrative receiver out of court. The agency said it was comfortable that if any of the fixed charges were re-characterized as floating, the borrower security trustee should still hold a qualifying floating charge for the purposes of appointing an administrative receiver. "The [whole business securitization] rating methodology Fitch uses assumes that the borrower will continue to operate as a business," explained analysts. "Consequently, the agency does not view as a rating negative the fact that the claims of preferential creditors rank ahead of the security trustee where charges are re-characterized from fixed to floating, since these costs would probably have been paid to maintain the business operations."
A re-characterization could, however, result in an increased loss severity given default but this should not impact a business' ability to generate operating cash flows and as such should not impact the timely payment of the rated liabilities. Fitch said that it would be reviewing all whole business transactions on a case-by-case basis.
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