Moody's Assesses Role of Trustees in ABS & RMBS; Some ABS & RMBS Ratings May Be Placed on Review

In a research report released today, Moody's details its concerns relating to the role of trustees in some asset-backed (ABS) and residential mortgage-backed (RMBS) securities. The report notes that Moody's is in the process of evaluating the role of trustees in the structured finance market.

In conversations with prominent ABS and RMBS trustees, some divergence between Moody's understanding and the trustees' views of their responsibilities has come to light. As a result, Moody's has begun an examination of ABS and RMBS securities that it believes may have weak provisions regarding the oversight of seller/servicers. Transactions that may be deficient will be subject to additional scrutiny and may be placed on review for possible downgrade.

Moody's initiated this study last November following the default of National Century Financial Enterprises (NCFE) and the deteriorated performance of NCFE-originated, healthcare receivables-backed transactions issued by two special purpose entities, NPF VI and NPF XII.

"Moody's analysis of ABS and RMBS transactions incorporates an understanding of the responsibilities of the trustees. It now appears that, in some cases, the trustees' own views of their responsibilities differ from Moody's understanding of the role the trustees are willing to play," said Claire Robinson, Senior Vice President.

Moody's considers the role of the trustee to be an important factor in the ratings of ABS and RMBS, particularly if the seller/servicer is of low credit quality. Trustees are generally responsible for holding transaction cash flows in segregated accounts, notifying investors and rating agencies of covenant breaches and events of default, and managing servicing transfers if the original servicer is no longer able to function as it should.

"If the trustee has no oversight function, the integrity of some ABS and RMBS transactions is overly dependent on the willingness of transaction participants to report their own failures to comply with transaction documentation," Ms. Robinson explained.

In conversations with some trustees, Moody's has found that some view their role as purely administrative. As a result, the degree of oversight with respect to the distribution of transaction cash flows is, in some cases, not as great as Moody's had previously understood it to be. Furthermore, based on recent instances, it appears that investors - rather than the trustees - will bear the brunt of higher-than-anticipated servicing expenses if a successor servicer is appointed or alternative servicing arrangements are adopted.

In response to these concerns, Moody's is examining ABS and RMBS where the trustee is more likely to be called upon to perform functions beyond the purely administrative, focusing on transactions with servicers that are unrated or rated below investment grade.

"Going forward, Moody's analysis of ABS and RMBS transactions will include a greater emphasis on the components of the trustee's function that could impact the cash available to pay investors' principal and interest," Ms. Robinson said. Moody's will continue to consult with trustees active in ABS and RMBS to resolve ambiguities regarding the trustee's role.

Moody's study encompasses approximately 2,500 ABS and RMBS transactions. Moody's views are detailed in a report titled "Moody's Re-examines Trustees' Role in ABS and RMBS."

TO READ IT CLICK HERE (pdf file)