Moody's confirms ratings in two Emirates NBD PJSC transactions.
The rating of the series APC notes in Emirates NBD Auto Finance Limited (the underlying transaction) incorporates a strong level of credit linkage to Emirates NBD PJSC ( Emirates; B1/P-2) as the swap counterparty for a balance guaranteed swap that converts the UAE Dirham proceeds into Japanese yen in order to pay the amounts due under the notes.
The rating action concludes the review of the rating on the series APC notes in the underlying transaction, which Moody's placed on review on 14 November 2013. The review focused on the swap counterparty exposure following Moody's introduction of the rating agency's updated approach to assessing swap counterparties in structured finance cash flow transactions.
As part of its review of the underlying transaction, Moody's has incorporated the risk of additional losses on the notes, in case the notes become unhedged following a swap counterparty default. Assets backing the notes in this deal are fixed-rate assets denominated in UAE Dirham, while the notes are referenced to Yen Libor. The transaction includes a swap agreement with Emirates to hedge the currency risk. Net swap payments in recent periods were in favour of the swap counterparty; given the current interest-rate environment however, future net swap payments could be infavour of the issuer.
Moody's understands that the swap is currently out of the money for the issuer. However, due its B1 rating, Emirates is posting collateral in accordance with the swap documents.
In confirming the rating of the underlying transaction, Moody's noted the strong performance of the asset pool, with cumulative defaults of 0.64 per cent, 90+ delinquencies stable at 0.46 per cent as of last reporting date on 30 January 2014, and that the pool is now amortising following the end of the reinvestment period. Because of this positive performance, Moodys expects enhancement to increase from its current level of 30.9 per cent and will provide sufficient cushion to insulate the transaction against counterparty risk.
Moody's has not updated its key modelling assumptions for this deal, because the deal's performance is in line with the rating agency's expectations.
Emirates NBD Auto Financing (the repack) is a repackaging of the underlying transaction notes where the main risk is that of the underlying transaction. The repackaged note also benefits from a principal guarantee from Japan Bank for International Cooperation (JBIC) (3). As such, investors have first recourse to JBIC irrespective of losses on the underlying transaction. Because the Emirates NBD Auto Financing Limited transaction is a repackaging of the underlying notes and benefits from a principal guarantee by JBIC, its 2 (sf) rating reflects the higher of the two ratings (i.e., the underlying transaction).
The rating action concludes the review of the rating on the repack, which Moody's placed on review on 18 December 2013. The review reflects the confirmation of the underlying transaction's ratings at 2 (sf).
Moody's notes that both transactions continue to be exposed to counterparty risk, reflecting (1) reliance on Emirates NBD PJSC (B1/P-2) as swap counterparty for the underlying transaction; and (2) the repack's reliance on JBIC, which acts as guarantor for the principal component of the transaction.
Factors that could lead to an upgrade or downgrade of the underlying transaction include (1) change in the credit quality of the counterparties and 2) a change in the expected performance of the underlying collateral.
Factors that could lead to an upgrade or downgrade of the repack include a change in the ratings of one or both of either the underlying notes, or JBIC, as the principal guarantor.
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|Date:||Feb 20, 2014|
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