February 11, 2011

Moody's: New operational risk guidelines could affect structured finance ratings

PARIS-- Moody's Investors Service expects to publish its operational risk guidelines for global structured finance transactions by the end of February 2011. This announcement follows the end of the request for comment period on 15 January 2011. The rating agency believes that the new guidelines could affect the senior ratings of up to 200 transactions worldwide. These transactions include around 80 RMBS, 30 ABS, 20 CMBS in Europe and 47 student loan ABS in the U.S.. The guidelines may also affect a limited number of structured credit transactions in Europe.

"The performance of a securitisation transaction depends not only on the creditworthiness of the underlying pool of obligors, i.e. the quality of the collateral, but is also closely linked to the operational performance of various transaction parties such as the servicer, trustee and cash manager," says Annick Poulain, a Moody's Managing Director.

Moody's confirms that comments from market participants are being assessed and incorporated into the final criteria. "The rating agency received more than 50 comments from investors, issuers and other market participants throughout the request for comment periods," says Kent Becker, a Moody's Senior Vice President. The comments primarily requested further clarification on the scope of the criteria.

Moody's originally announced its intention to revisit operational risk for structured finance transactions in November 2009 and has since published a series of reports on the topic. Moody's published an initial request for comment in May 2010, and followed up with a second report requesting feedback on additional proposed guidelines for global CLOs and US student loan ABS in December 2010.

The operational risk guidelines will set out Moody's specific considerations when analysing servicing arrangements, including back-up servicers, replacement facilitators, master servicers and third party servicers. The guidelines will also discuss the role that cash managers and calculation agents play in structured finance transactions and the importance of liquidity to cover payment shortfalls in the event a servicer disruption occurs.

The final published criteria will outline the operational risk characteristics that are commensurate with highly rated structured finance securities. For example, the US securitisation market is characterised by: (i) a history of successful servicing transfers; (ii) an abundance of available third party servicers; and (iii) trustees who are responsible for finding successor servicing or can serve as servicer of last resort. Conversely, European ABS and RMBS transactions are more vulnerable to servicer disruption risk, as the servicing market is more fragmented with less history of servicing transfers. Moreover, trustees generally do not have the responsibility of servicing or facilitating a transfer.

"Moody's expects the combination of negative rating pressure on servicers and cash managers, insufficient back-up servicer arrangements or the lack of dedicated liquidity to result in rating reviews on around 130 European securitisation transactions," continues Ms Poulain. "However, if transaction sponsors rapidly implement structural improvements to mitigate identified operational risks, watchlisted ratings could be confirmed," adds Ms Poulain.

The proposed operational risk guidelines could also potentially affect the ratings of 47 US student loan ABS trusts issued by 15 issuers. The rating agency outlined the reasons for this in its 14 January 2011 report, "Moody's Request for Comment, Companion Report to "Global Structured Finance Operational Risk Guidelines" -- A Focus on U.S. Student Loan Asset-Backed Securities (ABS) Operational Risk".