January 4, 2012 6:48 pm

Fitch warns on structured debt deals

European financials have been flouting the original terms on packaged debt deals they send to the European Central Bank to secure cash and allowing these credit ratings to slide, Fitch Ratings has warned.

The restructured deals highlight the intensified ratings pressure in the eurozone, as the slew of recent sovereign and bank downgrades feeds into structured finance transactions and even on to the ECB’s balance sheet.

Europe’s banks are able to use structured finance deals – bundles of debt such as asset-backed securities or collateralised loan obligations – as collateral to obtain financing from the ECB. The deals are known as “retained securitisations” because they are kept on the balance sheet of the issuing bank.

However, according to Fitch, some banks have been restructuring these deals, allowing them to fall from triple A but still meet the minimum collateral requirements of the ECB. The central bank requires that, outside of certain exceptions, the deals have a triple A rating when they are first created and maintain at least an A minus rating after they are issued.

Banks, particularly in peripheral countries such as Spain, Italy and Greece, have found their own ratings, and the structured finance deals they issue or act as counterparties to, increasingly under pressure. Rating agencies have downgraded a slew of the region’s sovereigns, and their banks, in recent months, which has an impact on the credit ratings of structured finance deals.

Altering “retained transactions – rather than to respect the terms of the original transaction documentation that are designed to ensure rating stability – is becoming more frequent”, Fitch said in a report. “This reflects the originator’s motivation – as the sole investor – to only preserve ratings that will continue to meet ECB eligibility requirements.”

Europe’s central bank has provided an unprecedented amount of support for the region’s financials in recent months, repeatedly widening the type of collateral it accepts as security for its financing and also offering banks new three-year loans. Still under-pressure European banks may be unwilling or unable to support their retained securitisations above the minimum requirements of the ECB.

More than half of Europe’s outstanding securitisations were “retained” as of the first quarter of 2011, according to the Association for Financial Markets in Europe. Before the crisis that figure was just 7.1 per cent, meaning the vast majority of deals were sold to non-central bank investors.

At the end of 2010, ABS was the biggest component of collateral held by the euro system, which includes Europe’s national central banks and the ECB. The next was covered bonds.

ABS deals accounted for €480bn of the €2tn of collateral submitted, according to Bank of America Merrill Lynch strategists. They forecast that to have risen to more than €500bn in the second half of last year, as many banks remained locked out of traditional funding markets.

For banks that “choose to amend or restructure [their securitisations] in this way, Fitch will downgrade affected transaction ratings to a level where it believes documents will be respected in the future”, the rating agency warned.

“Such behaviour will be an influencing factor in Fitch’s ratings of any subsequent new retained transactions for which the originator requests ratings.”

With additional reporting by Michael Mackenzie and Nicole Bullock

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