Alena Chen, assistant president and analyst at Moody’s Investors Service, says that as Euribor rates move further into negative territory – “beyond the buffer provided by the note margins” – such deals will need to make net payments to swap counterparties.
“The payment outflows reduce excess cash flow and can result in insufficient proceeds to make required payments to other transaction counterparties and noteholders,” Ms Chen said.
Moody’s noted that in a typical Euro currency swap, the swap counterparty will make Euro interest payments to the deal based on the index rate and margin, at a specified exchange rate.
“In a negative interest rate environment, if the all-in interest rate (index plus margin) is negative, then net monies are owing to the swap counterparty and the deal has to exchange additional cash flows to make the payments to the swap counterparty,” Moody’s said.
“Deals will only need to make net payments if the sum of the Euribor rate and note margin is negative. The higher the note margin, the larger the buffer it provides against negative Euribor rates.”