February 11, 2011
Moody's: New operational risk guidelines could affect structured finance
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
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".