A ratings agency has launched a review of a controversial form of credit insurance described as "a riddle wrapped up in a mystery".
Fitch Ratings said it was concerned that the tradable derivatives ...
A ratings agency has launched a review of a controversial form of credit insurance described as "a riddle wrapped up in a mystery".
Fitch Ratings said it was concerned that the tradable derivatives, called self-referenced credit linked notes (CLNs), concentrated risk in the issuer.
Fitch started asking questions about self-referenced CLNs when it emerged that Parmalat, the failed Italian milk group, had invested £21.5m in self-referenced CLNs issued by Sires-Star #121, a special purpose vehicle set up by Merrill Lynch International in the Cayman Islands.
Fitch reported: "The primary concern is that these investments may be rated at the level of the company at the time of issuance, but the liquidity and credit profile is correlated 100% to the company's credit profile.
"As such, liquidity and capital resources are tied up in a financial asset that has diminishing value at exactly the wrong time - when the company is under financial stress."
It added that a "CLN investment may accelerate the financial decline rather than serving as a buffer."
The market for self-referenced CLNs is believed to be small but Fitch said "it could be argued that the risks outweigh any short-term benefits."
Fitch will survey companies and warned that any using self-referenced CLNs could see their credit ratings changed as a result.
Hosted by comedian and actor Tom Allen, 34 Gold, 23 Silver and 22 Bronze awards were handed out across an amazing 34 categories recognising brilliance and innovation right across the breadth of UK general insurance.
