Standby is a backup service normally required for institutions rated at Ba1 (one notch below Baa3) or below on their securitised portfolios. It is designed to give bondholders reassurance that the mortgages will continue to be administered should the primary servicer fail.
Moody’s says the review has been prompted because “the UK authorities have made it clear they do not view the UK banking sector as a ‘zero failure’ system” forcing it to review systemic support assumptions currently embedded in its senior debt ratings for UK financial institutions.
Steve Rogers, head of securitisation services at HML, said that many organisations with historically high ratings may be unaware they will need a backup servicer should they be downgraded.
“I would advise anyone currently rated at Baa3 to engage a standby servicer immediately and those rated at Baa1 and Baa2 to make it a priority, as the standardisation of backup servicing arrangements now states that the servicer must take over servicing within 60 days of standby being invoked.
“The process begins with the primary servicer and backup servicer agreeing procedures around the transfer of servicing, should the standby contract be invoked. This is followed by a full operational review of the primary servicer and a subsequent data mapping exercise.
“I’m advocating urgency because these downgrades will be instantaneous when they happen and will have an impact on business performance.”
Rogers continued: “There is also no guarantee that Moody’s will only downgrade by one or two notches, should the circumstances warrant it, they may downgrade by more than that at once.
“These new measures will uncover the real picture, unlike in a system where no-one can fail and ratings are almost superfluous. I expect Moody’s ratings to recover after initially falling as capital investment increases and a number of state-driven initiatives designed to encourage more sustainable and responsible banking take hold.”
