Fitch Ratings has affirmed Scottish Equitable GBP250m value of in-force (VIF) securitisation fixed-rate loan notes due 2023 at ‘A’. The affirmation reflects the performance of the transaction, which is in line with Fitch’s expectations, and a review of the projected cash flows for the transaction.
The transaction, referred to as ‘Zest’, is a securitisation of the future profits arising from a book of unit-linked pensions business. Scottish Equitable is the principal UK subsidiary of AEGON N.V. (AEGON; ‘A’/ Stable). The issued notes do not benefit from a financial guarantee insurance policy and there is no recourse to Scottish Equitable.
Although the transaction is a contingent loan with no recourse to the sponsor, the rating of the notes has been established under Fitch’s Corporate Finance methodology (see applicable criteria links below). This is because in Fitch’s opinion, the transaction has no significant structured finance elements.
The rating is based on analysis of the transaction documents, the volatility of underlying profit sources, and analysis and stress-testing of the transaction’s projected cash flows. Fitch’s rating process at the outset of the transaction included a review of the embedded value methodology, assumptions and actuarial model developed by Scottish Equitable. Tillinghast, an actuarial consulting firm of Towers Watson, independently reviewed the model and the assumptions used. These assumptions are updated on an annual basis by AEGON and reviewed by Fitch.
Fitch annually reviews the stress test applied to the projected cash flows from the transaction. It takes the form of a day-one crash in equity and property prices of 45% combined with future lapse rates multiplied by 205% and future investment returns on each class of asset reduced by 100 basis points. The stress test was calibrated using Fitch’s stochastic model tailored to the defined block of business.
Zest’s performance in 2010 was slightly above expectations, with surplus arising over the year slightly ahead of estimates, due to favourable lapse experience and market performance.
Zest could be subject to a downgrade if, in Fitch’s opinion, future cashflows are unlikely to be sufficient to cover the repayment of the loan and interest payments under a ‘A’ stressed scenario or if the transaction underperforms by more than GBP15m in one year or GBP30m on a cumulative basis. The transaction could also be downgraded if Fitch’s opinion of Scottish Equitable’s credit quality deteriorates. Zest could be upgraded if repayments exceed modelled projections by GBP30m (currently GBP6m) cumulatively or by GBP15m in one year.
Source : Fitch Ratings Press Release
