Downgrades ‘Unlikely’ for UK Notes, Despite Conflicts of Interest: Moody’s

Despite conflicts of interest presented when originators acquire structured finance notes through the central bank repo system present in the UK, the likelihood of rating actions on notes used as repo collateral remains low, according to Moody’s Investors Service.

The London-based structured finance division of Moody’s indicated in a statement Wednesday it is common in current market conditions for notes issued by a structured finance issuer to be acquired by the related originator under a central bank repo.

An originator that also acts as the sole noteholder can waive breaches of transaction documents or consent to the modification of transaction documents.

This ultimately represents a conflict of interest, Moody’s said, as originators typically act as parties to various transaction documents, influencing the adoption of favorable noteholder resolutions that might also be prejudicial to the credit quality of the notes.

Despite the obvious conflict of interest, the fact that notes used in bank repo transactions are required to maintain a minimum rating makes it unlikely that any originator would want to procure a waiver or amendment that would have a negative rating effect on the notes, Moody’s said.

In other words, as long as notes are expected to be used as repo collateral, a rating impact due to conflicts of interest is unlikely in cases where the acquiring party is also the originator.

“For example, Moody’s recently became aware of a noteholder resolution directing the issuer and trustee to waive certain rating trigger breaches relating to the originator,” the ratings agency said. “[F]ollowing discussions with Moody’s, the originator amended the relevant resolution so as to avoid a rating action.”

Write to Diana Golobay.