Friday, June 25, 2010

S&P announces which instruments will carry a structured finance qualifier

LONDON (Standard & Poor's) June 25, 2010--Standard & Poor's Ratings Services
has today announced the categories of debt instruments whose ratings will have
a structured finance identifier as required under the new European regulation
on Credit Rating Agencies (Regulation (EC) No 1060/2009) (the "regulation").
We will apply the symbol to all relevant structured finance ratings globally
by early September.

On Feb. 16, 2010, we announced our intention to give all ratings on structured
finance instruments an additional identifier in line with the regulation, and
at that time indicated that we would consider which instruments we believe
will require the identifier (see "S&P To Add Symbol To Global Structured
Finance Ratings," published Feb. 16, 2010).

In making our decision, we considered both the definition of "Structured
Finance Instrument" referred to in the regulation (Capital Requirements
Directive 2006/48/EC, detailed further below) and the principles we believe
the EU intended to establish in the regulation.

We will deem the following types to be structured finance instruments under
the regulation, and will therefore apply an identifier to their ratings:

* All asset-backed securities (ABS);
* All asset-backed commercial paper (ABCP);
* All commercial mortgage-backed securities (CMBS);
* All single and multi-tranched collateralized debt obligations (CDOs) and credit default swaps (CDS), except "single-name CDS";
* All residential mortgage-backed securities (RMBS), including debt backed by mortgages issued by the Japan Housing Finance Agency;
* All insurance securitizations with more than one tranche of debt;
* All project financings with more than one tranche of debt;
* All enhanced equipment trust certificates (EETCs) with more than one tranche of debt;
* All corporate securitizations with more than one tranche of debt; and
* All gas prepay transactions with more than one tranche of debt.

We have come to this decision after consultation with market participants and
an internal review of the instruments that this requirement could potentially

The definition of structured finance instrument, as referenced in the
regulation, is as follows: "(36) 'securitisation' means a transaction or
scheme, whereby the credit risk associated with an exposure or pool of
exposures is tranched, having the following characteristics:
(a) payments in the transaction or scheme are dependent upon the performance
of the exposure or pool of exposures; and
(b) the subordination of tranches determines the distribution of losses during
the ongoing life of the transaction or scheme."

Some instruments to which we will apply the identifier may not correspond to
commonly-held views of structured finance instruments. In addition, we will
not apply the identifier to certain instruments commonly referred to in the
market as structured finance. In the interest of providing transparency, we
will publish shortly a separate report explaining the principles and
assumptions that guided our decision. The following are the key principles and
assumptions we considered:

* We believe that a proper reading of the regulation requires us to place an identifier on all instruments that meet the regulatory definition and only on those instruments.
* We believe the definition of "structured finance" should be an objective definition--for example, only if we believe the instrument falls within the definition set out in the regulation, will we apply the identifier. The definition should not be tied to how our criteria view the instrument's risk, or to commonly-held market perceptions of what does and does not constitute a structured finance instrument.
* We have interpreted "tranche" to refer not just to separate issues of a capital market or loan instrument by the same issuer in respect of the same transaction but to any form of financial or economic interest in a horizontally-sliced credit exposure, however this is derived. This would include for example, the use of deferred purchase prices, attachment points, discount sales, and other "credit-enhancing" devices.
* In our view, the definition in the regulation stating that the "exposure" that is tranched should not be interpreted to refer to the exposure to an issuing corporate entity. Rather, we interpret the regulation to provide that in order to qualify as a structured finance instrument, the transaction must contain two layers of risk, with the rated layer being a means to convey to the investor the credit risk of a second, underlying layer.
* We have included "wrapped" transactions--such as letter of credit, guaranteed, and monoline insurance transactions--in our interpretation of structured finance instruments under the regulation when what is "wrapped" is itself a structured finance transaction according to the regulation. Although in such transactions we usually base our rating on the rating on the insuring party, as stated above, we believe that the use of the identifier should not depend on our criteria. In these transactions, the payment in the transaction is dependent on two credits: the first is the performance of an exposure or pool of exposures, the second is the guaranteeing entity. We believe that if the existence of a guarantee alone were sufficient to remove the requirement for an identifier, in theory a special-purpose entity could be created to serve as a guarantee for a particular transaction, thus removing the requirement for an identifier to be assigned, regardless of the underlying strength of the special-purpose entity. We do not believe this result would be consistent with the intent of the regulation. We have therefore formed the opinion that any transaction that would otherwise require an identifier cannot lose that identifier, merely by reason of being guaranteed.

The symbol that we will use for the ratings on the instruments mentioned above
is "(sf)". We will add this identifier as a suffix to our existing ratings
symbology (see "Standard & Poor's Ratings Definitions," published Feb. 15,
2010). We intend to apply the identifier to all new ratings before the date
that regulated compliance begins under the regulation. We also intend to apply
the identifier to existing transactions in due course.

As we announced in February, we will apply the identifier irrespective of
where the structured finance instrument is issued, or the location of the
issuer, originator, or assets.

We welcome continued dialogue with interested parties on this topic.

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