Fitch Ratings has affirmed the ratings assigned to the guaranteed investment contract (GIC) obligations of Grand Central Funding Corporation (Grand Central) at 'AAAsf/F1+sf' with a Stable Rating Outlook.
Fitch's review follows an amendment executed by Grand Central on Jan. 31, 2011 which increased the minimum overcollateralization levels the program maintains with respect to eligible repurchase agreement (repo) collateral. The rating affirmation reflects the credit quality and liquidity of the repurchase agreement collateral, which is limited to U.S. Treasury and Agency securities, the consistency of the amended repo overcollateralization amounts with the discount factors outlined in Fitch's closed-end fund rating criteria, the administrative and financial resource commitments of UniCredit Bank AG, NY Branch (UniCredit, rated 'A+/F1+' with a Stable Outlook by Fitch), as swap counterparty and liquidity provider, and the structural protections provided in the transaction documentation.
Grand Central is structured to issue GICs primarily to municipalities and other third parties engaged in municipal finance transactions. The GICs represent obligations of Grand Central that pay the holders a pre-specified rate of return over the life of the contract. The proceeds generated from the sale of the GICs are invested in cash and repurchase agreements, accompanied by balance guarantee swaps provided by UniCredit pursuant to Hedge Agreements, in order to support payments of amounts due on the GICs and other costs and expenses of the company's operations.
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. As Hedge Counterparty, a downgrade of UniCredit to below 'A+' would require posting of collateral to secure its obligations. Furthermore, 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.
As of Jan. 31, 2011, Grand Central had outstanding GIC obligations of $56 million.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Closed-End Fund Debt and Preferred Stock Rating Criteria' dated Aug. 17, 2009;
--'Counterparty Criteria for Structured Finance Transactions' dated Oct. 22, 2009;
--'Global Structured Finance Rating Criteria' dated Aug. 16, 2010;
--'Rating Market Value Structures' dated March 22, 2010.
Applicable Criteria and Related Research:
Rating Market Value Structures
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=507187
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326
Counterparty Criteria for Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=475588
Closed-End Fund Debt and Preferred Stock Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462492
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