DBRS Publishes Updated Legal Criteria and Swap Criteria for Canadian Structured Finance

DBRS has today released updated versions of its “Legal Criteria for Canadian Structured Finance” (the Legal Criteria) and its “Swap Criteria for Canadian Structured Finance” (the Swap Criteria). Each of the methodologies is applied to Canadian structured finance transactions in addition to the relevant asset-class methodology. Publication of the updated Legal Criteria and Swap Criteria is part of DBRS’s ongoing efforts to provide greater transparency to the ratings process by outlining the various factors DBRS expects to see in transaction documentation, particularly for transactions rated AAA (sf) or R-1 (high) (sf).

Key features of the updated Legal Criteria include the following:

(1) The overall methodology has been streamlined and overlapping sections have been deleted.

(2) DBRS will now accept prior written notice of matters such as material amendments, waivers and consents in the event that they are approved by noteholders (rather than having to satisfy the Rating Agency Condition in all cases, as was required in the previous draft).

(3) The requirements expected to be met by certain transaction parties have been clarified, such as for trustees, financial services agents and custodians.

(4) The Special-Purpose Vehicle section has been expanded to include limited partnerships (LPs) since it is now common to use LPs in structured finance transactions.

(5) A list of permitted investments, in which collections can be invested between settlement periods, has been added.

(6) The Québec Perfection Guidelines have been simplified and clarified for transactions that include Québec assets.

(7) Three new user-friendly summary tables have been added to Appendix A, summarizing the following:
– The requirements to be met by specific transaction parties (such as trustees, financial services agents, custodians, servicers, credit enhancers, liquidity providers, swap counterparties, account banks and/or eligible institutions and special-purpose vehicles), including any ratings requirements, replacement requirements and liability and standard of care requirements.
– The requirements for other key transaction provisions (such as cure periods for events of default, amortization events and servicer termination events; requirements to make material amendments or for transaction parties to grant waivers or consents; partial commingling conditions; acceptable priority of swap payments; and a list of permitted investments).
– Legal opinion matters to be addressed (such as true sale, enforceability, bankruptcy opinions, security interests, bulk sales (where applicable) and non-consolidation (where applicable)).

The Swap Criteria has been updated primarily to make clarification and editorial amendments, such as the following:

(1) Eligible collateral (as defined in the Swap Criteria) must be posted pursuant to official International Swaps and Derivatives Association (ISDA) documentation, such as the Credit Support Annex.

(2) An assignment to a counterparty after a downgrade must be on the same terms as the original swap and cannot result in any tax consequences or increased costs to the note issuer.

(3) Account bank requirements, where collateral or cash and/or securities are held as security for a counterparty’s obligations (also referred to in the Legal Criteria), have been added.

(4) The valuation percentage that will be assigned to eligible collateral has been clarified to include the last day of the particular term.

Two new user-friendly summary tables have also been added to Appendix A of the Swap Criteria, summarizing the following:

(1) The requirements to be met by specific transaction parties (such as swap counterparties, account banks and eligible institutions, custodians and indemnity providers), including any ratings requirements, replacement requirements and liability and standard of care requirements.

(2) The requirements for other key swap provisions (such as acceptable priority of swap payments, acceptable timing and/or maturity of swaps and requirements to be fulfilled upon transfer or assignment of a swap).

If you have any questions regarding the updated Legal Criteria or Swap Criteria, please feel free to contact Debbie Caruso or Jamie Feehely.

The methodologies providing DBRS's processes and criteria are available by contacting us at info@dbrs.com.