Titlos and Greek currency swap titillation | FT Alphaville

Titlos and Greek currency swap titillation

You are looking at a page on the National Bank of Greece’s (NBG) website that once, presumably, would have held the prospectus for Titlos Plc — a special-purpose vehicle created in 2009 to securitise a now-infamous swap agreement between the Greek bank and the country’s government.

The prospectus for the deal, arranged by Goldman Sachs, has gone missing from the NBG website. But there’s a good summary of it here, and you can still take a look at its structure here.

As financial blog Zero Hedge points out, the vehicle is of interest because of the complex interplay of sovereign and structured finance ratings. For a start, Titlos closely mirrors the ratings of Greece itself.

Moody’s, for instance, downgraded the vehicle right after downgrading debt-laden Greece:

Paris, December 23, 2009 — Moody’s Investors Service has today downgraded to A2 from A1 the rating of the notes issued by Titlos plc. This rating action follows Moody’s downgrade of the foreign and local currency ratings of the government of Greece to A2 from A1 on 22 December 2009. Moody’s rating for the Titlos plc transaction is linked to the rating of the the Greek government on a one-to-one basis.

The big question then is what becomes of Titlos if and when Greece is downgraded. FT Alphaville readers will remember that Moody’s holds a “whip hand” over Greece. It’s currently the only rating agency that had Greece above the BBB-level (at A2), though it’s warned a downgrade could be on its way if the country fails to successfully implement its fiscal austerity programme.

If Greece’s last A-level rating goes, so too could the A2 rating of Titlos.

At that point the trigger clauses contained in that prospectus become important. NBG is the hedge provider and under the summary terms of the deal it looks like its credit rating is sort of delinked:

The Hedge Agreement complies with Moody’s hedge de-linkage criteria for cash flow transactions. Therefore Moody’s had not modelled the impact of NBG’s credit risk (as Hedge Provider) on the expected loss posed to investors.

Here’s where things start to get legally and financially complex. The issue is when Titlos might have to start posting collateral if NBG is downgraded, perhaps on the heels of Greece itself.

Zero Hedge quotes stuff like the below:

The Moody’s Criteria permits a hedge counterparty to enter into a hedge transaction with an SPV and continue to participate in that transaction without collateralizing its obligations so long as it maintains a long-term senior unsecured rating of at least A2 and a short-term rating of P-1 (or, if such hedge counterparty has only a long-term rating, at least A1) (the “Moody’s First Trigger Required Ratings”).

Without having gone through the terms of the deal and the full 46-page Moody’s criteria in detail, and consulting some securitization lawyer-types, it’s difficult for FT Alphaville to speculate. In the meantime though, we’ll note that there’s not a little bit of irony here. In fact, there’s a lot.

Much of Greece’s current troubles began with the downgrades to its sovereign debt. The issue was that if the debt was downgraded to below the A-level it would no longer be eligible for the European Central Bank’s (ECB) liquidity operations, which are due to return to their normal A3/A- threshold soon.

The bonds issued by Titlos were reportedly retained by the Greek bank.

For use as collateral to “borrow even more from the ECB.”


Related links:
How to borrow €1bn without adding to your public debt figures
– FT Alphaville
Greek woes revive seven-year old Goldman swap story
– Risk