DBRS Publishes Updated Hedge Counterparty Criteria for Canadian Structured Finance

DBRS Limited (DBRS) has today released an updated version of its Hedge Counterparty Criteria for Canadian Structured Finance (the Hedge Counterparty Criteria), which supersedes DBRS’s Swap Criteria for Canadian Structured Finance published in November 2010. The Hedge Counterparty Criteria is applied to Canadian structured finance transactions in conjunction with the relevant asset-class methodology. Publication of the updated Hedge Counterparty Criteria is part of DBRS’s ongoing efforts to provide greater transparency to the ratings process by outlining the various factors that DBRS expects to see in transaction documentation.

Key features of the updated Hedge Counterparty Criteria include the following:

(1) Clarifies that the criteria applies to various types of hedges used in Canadian structured finance transactions, including swaps.

(2) Clarifies that the criteria does not apply to what DBRS considers an “off-market” hedge, which will be considered on a case-by-case basis in the context of the applicable credit rating analysis.

(3) In addition to the published criteria that applies to Canadian structured finance transactions rated AAA (sf) or R-1 (high) (sf), rating thresholds have been added for transactions or securities rated AA (low) (sf) or R-1 (middle) (sf): the hedge counterparty is expected to be rated at least “A” or R-1 (low) at inception of the hedge and is expected to be subject to taking some remedial action if its rating drops below “A” or R-1 (low). Where a second ratings trigger is used (in the case where the remedial action chosen after the first ratings threshold is no longer met), the hedge counterparty is expected to take some remedial action if its rating drops below BBB or R-2 (middle).

(4) Clarifies DBRS’s expectations with respect to the calculation of the amount of collateral to be posted if that remedial action is selected after the hedge counterparty is downgraded.

(5) Clarifies DBRS’s expectations that the hedge will terminate in the event that the hedge counterparty fails to take remedial action within 30 days of being downgraded.

(6) The reference to indemnities being used to cover certain risks has been deleted from the criteria as these are not common and are considered by DBRS on a case-by-case basis.

The remainder of the changes to the Hedge Counterparty Criteria are generally editorial in nature.

DBRS does not view the updates to the Hedge Counterparty Criteria as significant and has determined that the updated Hedge Counterparty Criteria will not result in any impact on existing Canadian structured finance ratings.

If you have any questions regarding the updated Hedge Counterparty Criteria, please feel free to contact us at info@dbrs.com.