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TEXT-Fitch: Lloyds' Sandown Gold unlikely to suffer from mis-sold swaps
July 25, 2012 / 1:44 PM / 5 years ago

TEXT-Fitch: Lloyds' Sandown Gold unlikely to suffer from mis-sold swaps

 (The following statement was released by the rating agency)
 July 25 - Fitch Ratings does not expect the mis-selling of interest rate
hedging products to UK SMEs to have any impact on the three transactions it
rates from Lloyds Banking Group's Sandown Gold programme. Even if an
SME were able to set-off a claim in the event of originator insolvency, all
three transactions have provisions in place to mitigate set-off risk.

Lloyds is one of four banks that have agreed with the Financial Services
Authority to provide redress on the sale of structured collars to
non-sophisticated customers, and review sales of some other interest rate
hedging products. Where applicable, the appropriate redress could include
cancelling or replacing existing products, and partial or full refunds, the FSA
has said.

It is not yet clear whether borrowers in Sandown Gold plc, Sandown Gold 2011-1
plc and Sandown Gold 2012-1 plc will be involved in this process. All three
deals are securitisations of loans primarily made to small or very small
("micro") SMEs. Our conversations with Lloyds indicate that structured hedging
products were less likely to have been sold to such borrowers (who in any case
generally preferred to hedge themselves against interest rate rises by taking
out a fixed rate loan), than to larger SMEs.

Regarding structural provisions, in both Sandown Gold 2011-1 plc and Sandown
Gold 2012-1 plc, a potential set-off funding note (PSOF) was issued at closing
which was larger than the initial set-off exposure, and the proceeds used to
acquire beneficial interest in additional eligible SME loans, thus providing
extra credit enhancement. In addition, quarterly set-off exposure recalculations
are made that include the mark-to-market value of derivatives transactions. If
these show set-off exposure increasing above the size of the PSOF, Lloyds will
commit to funding a set-off reserve in cash equal to this excess exposure.
Lloyds would advance those funds if it were downgraded below 'A'/'F1'.

In Sandown Gold plc, set-off risk is mitigated by a set-off reserve that would
be established if Lloyds were downgraded below its current rating of 'A'/'F1'.
This would be used to reimburse the issuer should any borrower invoke a right to
set-off. Again, the set-off reserve size would take into account the
mark-to-market value of the derivatives transactions.

We affirmed our 'AAAsf' ratings on Sandown Gold plc and Sandown Gold 2011-1
plc's notes in May.

The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at
All opinions expressed are those of Fitch Ratings.

 (New York Ratings Team)

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