Related Market Sector:
Fitch Ratings-Taipei/Paris/Singapore-11 August 2009: Fitch Ratings has today revised its criteria for Taiwan bond funds to reflect the local industry's trend that bond reverse repurchase agreement transactions (reverse repos) increasingly account for a greater share in bond funds' asset allocation (averaged at about 50%). The revised criteria will now give credits, albeit limited, to reverse repos' underlying collateral usually backed by government bonds and high-grade corporate bonds.
Fitch's rating criteria take into account local market practices relating to reverse repo transactions and the associated risks they present. While Fitch recognises the importance of collateral securing these reverse repos, the agency believes there are a number of structural and contractual deficiencies that substantially reduce the credit enhancements such collaterals provide. These include: a general lack of margin call mechanism linked to the value of repos' underlying collateral, which leaves lenders (ie. bond funds) exposed to interest rate and credit risks before contractual maturity; under-collateralisation, such that the amount of lending typically exceeds the value of collaterals; and the possibility of a lengthy process for bond funds to liquidate the underlying collateral of a reverse repo transaction in the event of borrower default, which could potentially undermine funds' liquidity stability.
Considering the above-mentioned constraints, when assessing credit risk of reverse repo transactions in fund portfolios, Fitch will lift the repo counterparty's Issuer Default Rating by up to one notch. The notching is in line with Fitch's Recovery Rating Criteria, assuming potentially good recovery prospects in the event of borrower default. In assessing the credit risk of a reverse repo transaction, Fitch considers government bonds and investment-grade corporate bonds as qualifying repo collaterals, while the agency takes heed of funds' potential concentration risks arising from their corporate bond exposures.
Following the criteria revision, Fitch has affirmed the credit ratings of Taiwan bond funds under its coverage. For a full list of rating actions taken today, please see separate rating action comments available at www.fitchratings.com.
Contact: Yuchi Fan, Jonathan Lee, Taipei, +886 2 8175 7600.
Media Relations: Shivani Sundralingam, Singapore, Tel: + 65 6796 7215,
Email:
shivani.sundralingam@fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
