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���������ֳ�-London/New York-19 August 2020: A recent U.S. Circuit Court decision regarding "flip clause" provisions is credit positive for Structured Finance noteholders in securitizations with swap agreements with U.S.-based counterparties, ���������ֳ� says. The ruling is not expected to have a material rating impact but ���������ֳ� will evaluate existing counterparty and derivative criteria for transactions with U.S.-based counterparties affected by this decision.

The U.S. Court of Appeals for the Second Circuit on 11 August, 2020 in the matter entitled Lehman Brothers Special Financing, Inc. v. Branch Banking and Trust Company, et. al., affirmed the lower court decisions of the U.S. District Court and the U.S. Bankruptcy Court, each located in the Southern District of New York, which held that the provisions of the transaction documents that subordinated the payment priority of swaps in favor of related noteholders (the so-called "flip clause") are protected by the safe-harbor provisions of Section 560 of the U.S. Bankruptcy Code. ���������ֳ� will continue to monitor the legal proceedings.

The flip clause is included in a structured finance priority of payments to protect noteholders from effects of a bankruptcy filing by a swap counterparty. Amounts payable by the issuer to a swap counterparty typically take priority over amounts payable to noteholders, except for the swap termination payments resulting from the bankruptcy of the swap counterparty. The court's decision confirmed the issuer's right to terminate the swaps taking into account the payment priority consistent with the relevant flip clauses.

The rating implications of this decision are expected to be relatively modest, as the issuance of U.S. structured finance transactions with swaps has been limited since 2018, due to two-way margin posting rules that have dis-incentivized the use of swaps in securitizations. For the same reason and due to the uncertainty of the enforceability of flip clauses in the U.S., U.S. counterparties have recently been largely absent from international structured finance transactions.

The decision, which remains subject to appeal, is nevertheless a positive sign for structured finance transactions with ratings constrained by uncertainty around the enforceability of flip-cause provisions. This could be particularly relevant for synthetic risk transfer transactions using credit default swaps, as an enforceable flip clause is a key consideration for mitigating the counterparty credit risk.





Contact:

Andreas Wilgen
Group Credit Officer, Structured Finance
+44 20 3530 1171
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30 North Colonnade
London E14 5GN

Joyce Fargas
Group Credit Officer, Structured Finance
+1 212 908-0824

Mark Brown
Senior Director, ���������ֳ� Wire
+44 20 3530 1588

Media Relations: Athos Larkou, London, Tel: +44 20 3530 1549, Email: athos.larkou@thefitchgroup.com
Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com