Issuance Barely Avoids Ratings Fall Caused by Counterparty

The problem has now been averted, but a small drama playing out in Spain demonstrates just how sensitive the ratings of covered bond issuances can be to the quality of their counterparties.

Banque AIG serves as a counterparty—the "liquidity facility provider"—for a Spanish covered bond issuance, Cédulas TDA V, FTA.  On October 17,  Banque AIG breached a Moody’s rating trigger in this role, which Euroweek wrote is “believed to be the first time this has [ever] happened on a covered bond.”  EuroWeek noted that if Banque AIG failed to mitigate the breach within a grace period granted by the ratings agency, Moody’s could review the Cédulas TDA V notes for possible downgrade—which presumably would be another “first” in the history of covered bonds.  EuroWeek quotes one analyst as saying, “This is completely new territory.”

As it happened, on November 17 Moody's afirmed its Aaa rating for Cédulas TDA V, "following confirmation that Banque AIG, London Branch has transferred the committed amounts under the liquidity facility agreement to a deposit held in the Fund's name at an entity rated Prime-1."  But things could have turned out differently.

If you are a EuroWeek subscriber, you can read their story there: “Bank AIG in TDA rating trigger breach, as primary dead.”  You can also pay to download the story from Factiva.

If you are logged in for a (free) signup at Moody's, you can read their November 17 press release here.

Related Item: To read a Covered Bond Investor posting on the issuers' 2004 road show for Cédulas TDA V, click here.