Fitch Affirms Grand Central Funding Corp.'s GIC Obligations at 'AAAsf/F1+sf'
CHICAGO -- February 1, 2013
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
--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
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
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
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
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
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Russ Thomas, +1-312-368-3189
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Yuriy Layvand, CFA, +1-212-908-9191
Ian Rasmussen, +1-212-908-0232
Sandro Scenga, New York, +1 212-908-0278
Press spacebar to pause and continue. Press esc to stop.