OREANDA-NEWS. Fitch Ratings says the recent change to the treatment of swap transactions from initial cost to current fair market value under the new UK financial reporting standards is neutral to the ratings of UK whole business securitisation (WBS) pub transactions.

The statutory accounts of Fitch-rated UK WBS transactions are generally prepared under existing UK generally accepted accounting principles (GAAP), meaning that they are required to prepare their accounts in accordance with the new standards for accounting periods beginning on or after 1 January 2015.

The adoption of the new standards will likely affect the calculation of the net worth covenant included in UK WBS transactions because any swaps must now be reported on the balance sheet at current fair market value instead of at amortised historical cost. The change can result in large variations in the net worth calculation due to the inherent volatility of swap mark-to- market (MtM) values. Furthermore, the current low interest rate environment results in significant MtM liabilities for issuers.

As a result, we expect WBS borrowers will seek to amend the net worth covenant calculation to remove the variable MtM component, so that the calculation remains equivalent to that prior to the revised financial reporting standards.

Nevertheless, the new reporting standards and the potential change in net worth covenant calculation would not have any rating impact on UK pub WBS. This is because firstly, , in evaluating the probability of debt service payment default Fitch's WBS analysis is primarily cash flow-based, therefore little credit is assigned to the net worth covenant. Secondly, both a significant swap MtM liability, and the potential MtM volatility are elements that the net worth covenant was not designed to incorporate.

Fitch will, however, consider senior ranking swap MtM liabilities in certain scenarios where appropriate, for example, in a liquidation scenario where Fitch perceives an increased probability of swap breakage costs being incurred.