Account banks, swap counterparties and liquidity facility providers getting downgraded is now the new norm. Not being able to locate replacements with the requisite ratings and/or the appetite to take on these roles on substantially similar terms is also passé. In reality, it is frequently the case that nothing changes. These entities are still performing their obligations and from an operational standpoint, the deal functions as it should. But the problem arises because of the by now oft used phrase “in breach”. The transaction documents oblige either the servicer or the issuer to search for replacements who hold the requisite ratings. Every day that an entity that is “in breach” of the rating triggers remains on the deal is a day where the issuer and/or the servicer is “in breach” of its obligations. This is despite the fact, that the deal may still be performing as it should!
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The Liquidity Eclipse
As was common at the time of the inception of the transaction, Danske Bank A/S (Danske) had provided a liquidity facility (LF) on a commercial mortgage-backed securitisation issued by the issuer, Gemini (Eclipse 2006-3) plc (Gemini). Due to the subsequent plethora of downgrades that have followed the financial crisis (from which the liquidity facility provider did not escape), a liquidity stand-by drawing of £64,000,000 was made by Gemini. The liquidity facility provider was entitled under the liquidity facility to recover any increased costs as a result of the application of Basel II (as implemented in Denmark) to the LF. A subsequent withdrawal by Moody’s of the separate rating obtained in relation to the LF caused a rise in the increased costs due to Danske being required to set aside more capital for regulatory purposes.
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