On 21 June 2012 Moody's Investors Service ("Moody's") downgraded the long term and short term ratings of 15 international financial institutions, some of the largest participants in the global structured finance market, with three large institutions being downgraded below single-A. The Moody’s downgrades (the "Moody's Downgrades") are possibly the most significant private sector downgrade since Standard & Poor's cut the credit ratings of a number of global financial institutions in December 2009. Despite the efforts of policymakers in several jurisdictions to lessen their importance, the credit ratings of participants in structured finance transactions are vitally important to the ratings of the asset-backed securities issued in those transactions. Financial institution rating downgrades in the past have resulted in a large number of transactions being restructured or terminated as a consequence of the effect of the downgrades on the structures.
This alert considers the impact that downgrades of financial institutions have had on structured finance transactions in recent years. We also highlight issues to consider and describe structures that may help to mitigate the effect on structured finance transactions of a rating downgrade of a transaction participant. This alert also considers the implications of the Moody's Downgrades on the market and highlights issues which may arise in structured finance transactions as a result of the Moody's Downgrades.
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