Fitch Affirms Grand Central Funding Corp.'s GIC Obligations at 'AAAsf/F1+sf'
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 special purpose vehicle with $27.5 million in total assets as of Dec. 31, 2012, 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.
--The credit strength of UniCredit, (rated 'A+/F1+' with a Stable Outlook by Fitch) as program liquidity provider and the capabilities of UniCredit as program administrator;
--The terms of the repurchase agreement between GCF and UniCredit, which restrict eligible collateral to U.S. treasury and agency securities and require margin to be maintained weekly in an amount consistent with 'AAA' stresses outlined in Fitch's closed-end fund criteria;
--Balance guarantee swaps provided by UniCredit that support payments of amounts due on the GICs and other costs and expenses of GCF's operations;
--Program liquidity compliance tests such as the Asset Liability Match Test (ALM Test) maintained to 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 $5.2 million or 19% of total assets in cash and liquid securities held in a custodial account at The Bank of New York Mellon for the benefit of GIC holders. A $15 million revolving credit facility provided by UniCredit as liquidity agent is also available for meeting current interest and principal due to GIC investors, although the facility has not had to be drawn to date.
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 Dec. 31, 2012, GCF had approximately $25.2 million or 92% of total assets invested in repurchase agreements. UniCredit was the sole counterparty for the repurchase agreements.
GCF makes margin calls on a weekly basis to the repurchase agreement counterparty if the market value of the eligible collateral falls below the required threshold. An Event of Default is triggered under GCF's Master Repurchase Agreement if the repurchase agreement counterparty fails to post the required margin within three business days. Under an event of default, collateral backing the repurchase agreement is liquidated by the custodian within five days.
The current low interest rate environment has limited the amount of return the program has been able to generate on its repurchase agreement 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. In the event of the default of the Hedge Counterparty, any amounts due by GCF under the hedge agreements would be subordinate to the principal and interest payments due to the GIC holders.
UniCredit, which is wholly owned by UniCredit S.p.A. (UC; 'A'/Stable Outlook) 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, 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'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The sources of information used to assess this rating were the public domain and UniCredit.
Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' dated Aug. 15, 2012;
--'Rating Market Value Structures' dated Aug. 16, 2012.
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
Rating Market Value Structures
Russ Thomas, +1-312-368-3189
Fitch Ratings, Inc.
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Yuriy Layvand, CFA, +1-212-908-9191
Ian Rasmussen, +1-212-908-0232
Sandro Scenga, New York, +1 212-908-0278