Greek structured finance deals can achieve Aaa ratings, subject to certain conditions

Moody's Investors Service said that subject to sufficient protection being put in place, Greek structured finance and covered bond transactions could achieve Aaa ratings. This follows an earlier report on February 4 where Moody's announced it was reviewing the potential implications of the changing situation of Greek public finances and would not issue any new Aaa ratings to Greek structured finance transactions until the conclusion of its review.
Moody's now believes that Greek structured finance and covered bond transactions could achieve an Aaa rating subject to three main conditions.
First, the credit enhancement available to the transaction is sufficient for the pool of collateral to withstand extreme scenarios, including those of potential government debt problems. Second, all operational risks in the transaction are satisfactorily mitigated, taking into account Moody's criteria for servicing, cash management and account banks. Finally, sufficient liquidity support is available to protect against the risk of payment default under the senior notes.
To determine the amount of credit enhancement necessary to achieve Aaa rating, Moody's considered a few extreme scenarios, such as the crisis in Argentina in 2000, which combined a systemic banking crisis together with a sovereign debt crisis and resulted in inflation exceeding 40% and a real GDP drop of more than 10%. In order to be rated Aaa, a transaction would need to survive a stress which is consistent with such an economic worst case scenario but specific to the type of the assets in the pool.
For example, this would potentially result in required credit enhancement ranges of 25 to 45% for residential mortgage, 40 to 60% for consumer loan and 45 to 65% for SME securitisations. For covered bond transactions, Moody's will update the collateral scores according to the analysis done for other asset classes and use the current Timely Payment Indicator (TPI) framework. A TPI is Moody's view of the likelihood that a covered bond investor will be paid timely interest and principal following a default of the sponsor of a covered bond program.
In the recent review of its criteria for Greek structured finance transactions, Moody's focused on macro-economic factors that can impact structured finance transactions, particularly those related to the sovereign.
In addition to factors typically associated with economic and financial volatility such as business failure rate, unemployment rate, interest rate and market price movements, the rating agency also considered factors related or highly correlated to the strength of public finances and to the local banking system. Long-term fiscal austerity, availability of credit in the event of a liquidity crisis and even civil unrest, amongst others, would impact the performance of securitised assets.
Moody's also considered Greece's membership of the European monetary union, which removes the risk of a devastating disruption to the national payment system. The rating agency believes the risk of a disorderly exit of Greece from the Eurozone is negligible.
Moody's has concluded that a significant stress on these macro-economic factors, including the government-related ones, would result in severe performance deterioration of securitised assets, but that the deterioration would vary depending on the type of assets in the pool. For instance, a loan to a small enterprise which is relying on uncommitted revolving lines from local banks would be more directly exposed to a liquidity crisis than a fully amortising mortgage loan.
On February 19, Moody's placed the Aaa ratings of all but one Greek ABS, RMBS, CLO and covered bond transactions under review for possible downgrade. Both existing and future ratings will need to pass the same stress levels deriving from the analysis of macro-economic factors.
Moody's said its review of all existing Greek structured finance transactions will focus on the three elements described above: available credit enhancement, the degree of liquidity and how operating risks are mitigated. It expects to conclude its review of existing transactions in the coming week and this review could also impact notes currently rated between Aaa and the Greek government debt rating level of A2.