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U.S. Structured Finance Appears To Have Minimal Exposure To Recent Rating Actions On First Republic Bank

NEW YORK (S&P Global Ratings) March 21, 2023-- U.S. structured finance transactions rated by S&P Global Ratings appear to have minimal exposure to the recent rating actions by S&P Global Ratings on First Republic Bank (FRB) (see "First Republic Bank Downgraded To 'BB+' From 'A-' On Funding Profile Risk," published March 15, 2023, and "First Republic Bank Downgraded To 'B+' Despite Support Received; Rating Remains On CreditWatch Negative," published March 19, 2023). Thus far, there is known exposure to FRB in only two structured finance asset classes: residential mortgage-back securities (RMBS) and variable-rate debt obligations (VRDOs).

There have been no structured finance-related rating actions to date in connection with the downgrade of FRB. As part of our ongoing surveillance activities, we are monitoring developments relating to FRB that may affect the limited number of transactions with exposure. What follows is a brief description of the RMBS and VRDO exposures we have identified.


We have identified several rated RMBS transactions for which FRB serves as bank account provider. (Bank account providers, which are not typically publicly named entities within RMBS securitization documents, briefly hold funds prior to disbursement to investors.) Due to the degree of reliance on the bank account provider, which acts as an eligible institution for the funds that support our rated transactions, we assess the credit risk related to such entities, and the transaction counterparty framework more broadly, through the application of our counterparty risk criteria (see "Counterparty Risk Framework: Methodology And Assumptions," published March 8, 2019).

A key aspect of our counterparty risk criteria, as related to a bank account provider/eligible institution, is the replacement of the counterparty if its rating falls below a minimum eligible rating (typically 'BBB'). Other supporting mechanisms (for example, if the bank account is governed by certain Federal Regulations), to the extent present, can mitigate the applicability of a rating under our criteria. Because the downgrade of FRB brings its rating below the minimum eligible rating threshold for certain transactions, it is possible--depending on whether there exist suitable supporting mechanisms--that impacted accounts would be moved to a different institution according to the governing documents.

In addition to its role as bank account provider, FRB also acts as servicer in various rated RMBS transactions. Our view of its servicing role within RMBS does not fall under the scope of the counterparty risk criteria; rather, it qualifies as operational-based criteria that are not directly linked to rating thresholds.


S&P Global Ratings rates three VRDO transactions for which payments of principal and interest on the bonds are backed by a fronting letter of credit (FLOC) provided by FRB. All three transactions also involve confirming letters of credit (CLOCs), which are provided by banks unaffected by recent events.

While bondholders typically receive funds from a draw on the FLOC, the document provisions requiring a full payment of principal and interest from the confirming provider result in credit risk being linked to the creditworthiness of the CLOC provider.

Related Research

This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

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