Structural protections and OC levels in FIGSCO bonds being marketed by Goldman Sachs are too weak for a rating uplift, Fitch said today (Monday), in a comment that bankers close to the new issue project said came as a surprise and questioned.

The Fitch comment came after Goldman Sachs wrapped up a five day roadshow of the secured product, which the investment bank is referring to as FIGSCO, for “fixed income global structured covered obligations”. An inaugural deal off a Eu10bn programme has been expected for this week, with a seven year or 10 year maturity understood to be under consideration and pricing set to be based on Goldman Sachs senior unsecured levels. A banker suggested a spread of the mid to high 40s over for a seven year FIGSCO issue. (See previous article.)

A banker close to the new issue project today said that fair value for Goldman Sachs seven year senior unsecured debt would be in the low 90s over mid-swaps.

Crédit Agricole, Goldman Sachs, Natixis and UBS have the FIGSCO mandate.

Standard & Poor’s is the only rating agency contracted to rate FIGSCO issuance, having on 25 June assigned a preliminary AAA rating to a theoretical Eu1bn July 2021 deal that served as the basis for a pre-sale report.

S&P’s triple-A rating of FIGSCO stems from the rating agency’s AAA rating of Goldman Sachs Mitsui Marine Derivatives Products (GSMMDP), which acts as the total return swap provider and is a joint venture jointly guaranteed by Goldman Sachs Group and Mitsui Sumitomo Insurance. GSMMDP is also rated by Moody’s, at Aa2.

Fitch today published a comment on FIGSCO, saying that a Fitch rating thereof would most likely be equalised with that of the total return swap provider even though a rating uplift would in principle be possible.

An uplift could be assigned if the structural protections led to stressed recoveries from the portfolio that were above average unsecured recovery levels, since the FIGSCO structure provides investors with recourse to both the swap counterparty and a segregated pool of assets, said Fitch.

“However, in this case, the structural protections and collateralisation levels are too low compared with our market value rating criteria,” it added.

Fitch does not rate GSMMDP and said that it “believes AAA ratings are not attainable for derivative product companies”.

Bankers close to the FIGSCO project were thrown by Fitch’s comment, saying that it came as a surprise, is in ways subjective, and is “effectively misleading”. They also questioned why the rating agency had published the “negative” comment.

Before this, Hélène Heberlein, managing director, covered bonds, at Fitch, told The Covered Bond Report that the rating agency decided to comment on the FIGSCO product given that it represents an innovation in the market and has attracted a lot of interest from investors.

“We are not in line to provide a rating for FIGSCO’s liabilities, but felt that because the structure is getting a lot of attention we should share our views and give guidance as to which criteria we would use to rate the notes,” she said. “This is not so much about entering the debate about whether it is a covered bond or not.”

Fitch’s comment is understood to be based on publicly available information.

The bankers close to the FIGSCO project said that Fitch’s comment is misleading because the rating agency does not state that it does not have a methodology to give credit to what they said were the three main features of the structure, namely daily mark-to-market valuations of the collateral, the assets themselves, and the recourse available to investors.

Fitch assessed the structural protections and collateralisation levels against its market value rating criteria. It said that these also analyse the level of OC based on frequent mark-to-market valuations of various types of assets to arrive at the stressed, or discounted, value of assets available to repay rated liabilities.

These criteria could be used to assess FIGSCO’s portfolio, it said. Its covered bond rating criteria could not, however, according to the rating agency.

“Fitch’s covered bond rating criteria do not offer a suitable framework for FIGSCO as the diversity of assets, daily marking to market and potentially high debtor concentrations are not typical features of covered bond programmes,” it said.

The bankers also took issue with Fitch’s description of the provisions for a liquidation of the collateral. Fitch said that “the selling agent has six months to sell the collateral in the event that a trigger is breached, compared with 45-60 business days (or shorter) typically seen in most market value structures” and that “the longer deleveraging period could lead to further market value erosion, reducing recoveries for bondholders”.

“We would also need to assess the selling agent’s ability to liquidate the range of security types and conduct ongoing surveillance of marked-to-market prices,” said Fitch.

One of the bankers close to the FIGSCO project said that the guidelines state that the liquidation should take place as soon as possible and only within up to six months if the latter period is to the benefit of the noteholders, and that this had not been reflected in Fitch’s comment.

“That shouldn’t be a negative,” he said.