Fitch warns of downgrades following Lehman ruling

Fitch says that European structured finance transactions may be affected more by last week’s Lehman Brothers bankruptcy court ruling than US deals. The rating agency said on Friday that it is reviewing all its structured finance ratings and will put on negative watch all deals where US laws could apply, where the ratings on the notes exceed the ratings of the counterparty, and where the counterparty exposure is material. It warns that deals could be downgraded to the rating of the swap counterparty in some cases.

The US court dealing with Lehman Brothers’ bankruptcy ruled last week that the “flip” clauses commonly used to subordinate payments to the counterparty in bankruptcy are not applicable. Fitch says that European deals may feel a greater impact of the ruling, because they make greater use of derivatives to hedge interest rate and foreign exchange risk.

In the US, RMBS and CMBS deals would see little impact, says Fitch, either because they do not make extensive use of hedges or because the swaps are of short duration.