LONDON (MNI) – Fitch Ratings has rated the EFSF’s E27bn bond
issuance programme but warns that a downgrade of any major guarantor of
the issue could result in a downgrade of the notes.

A full text of the note follows:

“Fitch Ratings has assigned the European Financial Stability
Facility’s (EFSF) EUR27bn guaranteed debt issuance programme a ‘AAA’
rating. All notes to be issued under the programme are expected to be
assigned a rating of ‘AAA’. In the event of a downgrade of a major ‘AAA’
guarantor and in the absence of additional credit enhancement, notes
issued and rated ‘AAA’ under the programme may subsequently be
downgraded.

“The ‘AAA’ rating of the notes is based on the credit enhancement
provided by the ‘over-guarantee’ mechanism and cash reserves in place.
The notes are irrevocably and unconditionally guaranteed by euro area
member states (EAMS) – except for Greece (‘BB+’/Negative) and Ireland
(‘BBB+’/Stable) which have ‘stepped out’ as guarantors – according to
their respective share of ECB paid-in capital and may be drawn on a
pro-rata basis by up to 120% in the event of a shortfall in amounts
necessary to honour principal and coupon payments. The ‘over-guarantee’
mechanism allows ‘AAA’ EAMS to provide credit support in an amount
greater than their share of due amounts and thus partially mitigates the
risk of non-payment by other guarantors with a weaker sovereign credit
rating. The cash reserves are sized to ensure that any potential
shortfall of ‘AAA’ guarantor coverage of EFSF debt payments due in the
event of a borrower default will be sufficient to meet all payments.

“A general cash reserve equal to the net present value of the
interest margin on the loan (net of the loan-specific cash reserve) from
the date of advance to its scheduled maturity date (as well as a 50bps
service fee) will be deducted from the cash amount disbursed to the EFSF
borrower. The general cash reserve is further supplemented by a
loan-specific cash buffer to ensure that the share of guarantees from
‘AAA’-rated EAMS and cash reserves provide full coverage of EFSF debt
instruments.

“The general and loan-specific cash reserves are subject to
investment guidelines that limit counterparty and credit risk. The
bond-specific cash credit enhancement will be invested in “high quality
liquid debt instruments”. Fitch has reviewed the investment guidelines
and judges that they are consistent with the ‘AAA’ rating of the notes.

“Notes issued under the EUR27bn programme will allow the EFSF to
lend up to EUR17.7bn to Ireland under the joint EU-IMF economic
programme recently agreed with the Irish authorities.

“The primary source of credit and rating transition risk on notes
issued under the programme is if one or more of the largest ‘AAA’
guarantors were to fail to honour its guarantee commitments or be
downgraded. In the unlikely event of a downgrade, the ‘AAA’ guarantees
plus cash coverage on notes previously issued under the programme could
drop below the level consistent with their ‘AAA’ rating in the absence
of additional credit enhancement.

–London Bureau; Tel: +442078627492; email: ukeditorial@marketnews.com

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