RPT-Fitch: FIGSCO Structural Protections Too Weak For Rating Uplift

Mon Jul 7, 2014 5:43am EDT

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July 7 (Reuters) - (The following statement was released by the rating agency)

The rating of Goldman Sachs' latest secured funding product, Fixed Income Global Structured Covered Obligation (FIGSCO), would most likely be equalised with that of the total return swap provider, says Fitch Ratings.

In principle, this style of transaction could receive a rating uplift above the rating of the swap provider if the structural protections led to stressed recoveries from the portfolio that were above average unsecured recovery levels, since the FIGSCO structure provides investors with recourse to both the swap counterparty and a segregated pool of assets. However, in this case, the structural protections and collateralisation levels are too low compared with our market value rating criteria.

The transaction is secured by a wide range of fixed income assets including securitised debt, sovereign bonds, and financial and non-financial unsecured debt with overcollateralisation (OC) levels that are marked to market daily. Our market value criteria also analyse the level of OC based on frequent mark to market valuations of various types of assets to arrive at the stressed, or discounted, value of assets available to repay rated liabilities and could be used to assess FIGSCO's portfolio. By contrast, Fitch's covered bond rating criteria do not offer a suitable framework for FIGSCO as the diversity of assets, daily marking to market and potentially high debtor concentrations are not typical features of covered bond programmes.

The collateralisation thresholds commensurate with 'AAA' and 'AA' ratings in our market value rating criteria are materially higher than the percentages contained in FIGSCO's portfolio guidelines. For example, the Goldman Sachs FIGSCO prescribes 105% collateralisation for 'AA+' to 'A-' rated bonds and 107% for bonds in the 'BBB' category. In comparison, in Fitch's criteria, the equivalent standalone 'AAA' collateralisation level for a structure backed by investment grade corporate bonds would range from 130% to 165%. For an 'AA' rating backed by corporate bonds, the collateralisation would range from 120% to 150%. The differences are higher for high yield debt. In order for FIGSCO to achieve a ratings uplift, OC levels would need to be materially higher, although not necessarily at the standalone levels cited above.

In addition, the selling agent has six months to sell the collateral in the event that a trigger is breached, compared with 45-60 business days (or shorter) typically seen in most market value structures. Triggers that result in prompt deleveraging in times of market stress are essential protections for senior creditors in market value structures. The longer deleveraging period could lead to further market value erosion, reducing recoveries for bondholders. We would also need to assess the selling agent's ability to liquidate the range of security types and conduct on-going surveillance of marked-to-market prices.

Goldman Sachs recently roadshowed a potential issue of a secured funding product that it has designated as FIGSCO. The issuer would be a special purpose vehicle backed by Goldman Sachs Mitsui Marine Derivatives Products (GSMMDP), a joint venture guaranteed by Goldman Sachs ('A') and Mitsui Sumitomo Insurance ('A+'). Fitch does not rate GSMMDP and believes 'AAA' ratings are not attainable for derivative product companies.

In the transaction structure, issuance proceeds would be used to buy assets, and the issuer would exchange payments on these for payments matching the terms of the notes via a total return swap with GSMMDP.

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