NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings assigned to the guaranteed investment contract (GIC) obligations of Grand Central Funding Corporation (GCF) at 'AAAsf/F1+sf' with a Stable Rating Outlook.
GCF, a bankruptcy-remote specialty purpose vehicle with $12.9 million in total assets as of April 30, 2016, was structured in 2001 to issue GICs primarily to municipalities and other third parties engaged in municipal finance transactions. The GICs represent obligations of GCF that pay holders a pre-specified rate of return over the life of the contract. The proceeds generated from the sale of the GICs are held in cash or invested in repurchase agreements and are accompanied by balance guarantee swaps provided by UniCredit Bank AG (UniCredit) pursuant to Hedge Agreements. GCF is technically in program wind down as no new GIC contracts have been written since 2005 and the program's administrator, Unicredit Bank AG, has no intention of making new investments for GCF.
KEY RATING DRIVERS
--The $12.7 million in outstanding GIC obligations continue to be covered by $3.6 million of cash and $10.7 million in repurchase agreement collateral, restricted to U.S. treasury and agency securities with required margin to be maintained weekly in an amount consistent with 'AAA' stresses outlined in Fitch's closed-end fund criteria.
--Program liquidity compliance tests such as the Asset Liability Match Test (ALM Test) ensure that GCF has sufficient liquidity to meet ongoing obligations in a timely manner by managing the gap between income and expenses.
GCF currently has $3.6 million in cash in addition to a $15 million revolving credit facility provided by UniCredit, as liquidity agent. The credit facility is to be used for meeting current interest and principal due to GIC investors and has not been drawn to date. The cash and liquid securities portion is held in a custodial account at The Bank of New York Mellon for the benefit of GIC holders.
To monitor liquidity, GCF maintains the ALM Test which is calculated on a daily basis. The ALM Test is satisfied when the weighted average duration mismatch between the company's investment portfolio assets and GIC liabilities does not exceed plus or minus 30 days. The ALM Test seeks to ensure that Grand Central has sufficient liquidity to meet ongoing obligations in a timely manner by managing the gap between income and expenses. The ALM Test must be met prior to each time a new GIC is issued or a new investment is made.
All repurchase agreements must be backed by either U.S. Treasury or Agency securities and overcollateralized by a minimum of 110% for securities with maturity of one to 10 years or 125% for securities with maturity of 10+ years. The collateral is held at a third party custodian, The Bank of New York Mellon. As of April 30, 2016, GCF had approximately $9.4 million invested in repurchase agreements. UniCredit is the sole counterparty for the repurchase agreements.
The current low interest rate environment has limited the amount of return the program has been able to generate on its repo activity. As such, the program is relying, in part, upon the proceeds from Hedge Agreements, with UniCredit as swap counterparty, in order to meet on-going interest payment obligations on the GICs. Pursuant to the Investment Agreement, failure of Grand Central to pay when due any amount payable under any GIC, the Liquidity Agreement or any Hedge Agreement and such failure remains uncured for three business days would result in the immediate acceleration and repayment of outstanding GIC obligations through the liquidation of repo collateral. In the event of the default of the Hedge Counterparty, any amounts due by Grand Central under such agreement would be subordinate to the principal and interest payments due to the GIC holders.
Given these structural elements, the credit quality and liquidity of the repo collateral and the sufficiency of repo overcollateralization levels, Fitch does not view the ratings assigned to Grand Central's obligations as being directly linked to those of UniCredit, despite the financial support currently being provided to the program. That said, the program's reliance on the balance guarantee swap counterparty, combined with the related structural protections, does create additional acceleration risk to GIC holders if UniCredit were unable to honor its obligations in the future.
UniCredit Bank AG is one of Germany's largest banks. UniCredit acts as the referral agent to GCF and is responsible for identifying investments eligible under GCF's guidelines. UniCredit also serves as administrative, hedging, and liquidity agent to GCF and is responsible for, among other duties, reviewing all potential investments to determine whether the investment is compliant, arranging for the appropriate documentation, hedging (if necessary) each investment, and monitoring investment performance.
Given structural elements of the program, including the credit quality and liquidity of the repo collateral and the sufficiency of repo overcollateralization levels, Fitch does not view the ratings assigned to GCF's obligations as being directly linked to those of UniCredit, despite the financial support currently being provided to the program. That said, given the program's reliance on UniCredit as liquidity provider, balance guarantee swap counterparty, and repurchase agreement counterparty, a downgrade of UniCredit would put negative pressure on the ratings assigned to the GICs.
The long-term ratings assigned to the GICs may also be sensitive to any changes to the repurchase agreements that lower margin requirements or broaden eligible securities, or a decision by UniCredit in the future to cease to post margin on the hedge agreements.
The short-term rating assigned to the GICs may also be sensitive to changes to the liquidity profile of GCF's assets, or a decrease to the size of the liquidity facility or a change to the credit profile of UniCredit, as Liquidity Agent.
For additional information about Fitch rating guidelines, please review the criteria referenced below, which can be found on Fitch's web site at 'www.fitchratings.com'.
The sources of information used to assess this rating were the public domain and UniCredit.
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Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 Apr 2016)
Rating Closed-End Funds and Market Value Structures (pub. 11 May 2016)
Dodd-Frank Rating Information Disclosure Form