Earlier this month Chris Jackson posted on the changes that have been made to PPF Type A guarantees under this year’s Pension Protection Fund levy determination, published in December 2011. Whilst Type A guarantees are by far the most popular type of contingent asset for PPF purposes, we do have a number of clients who have put in place or are looking to put in place Type C letters of credit. However the current Eurozone crisis is reducing the number of financial institutions that can meet the right criteria.
For companies wishing to put in place or certify a new letter of credit for PPF purposes and additionally for those who are preparing to re-certify current letters of credit, it is worthwhile remembering the requirement for the letter of credit to be issued by an “acceptable” financial institution. The PPF have defined this to mean a financial institution that:
(a) has a current Moody’s credit rating of Aa3 or better, or a current Standard & Poor’s credit rating of AA- or better, or a current Fitch credit rating of AA- or better;
(b) has been regulated and approved for business by the Financial Services Authority or its applicable successor, either directly or on the basis of rights in European Union law; and
(c) is domiciled in a “nominated jurisdiction” (broadly any state which is a member of the European Union or the Organisation for Economic Co-operation and Development, or Hong Kong).
Whilst this requirement has not changed since the last PPF determination for the 2011/2012 levy, with the recent downgrading of several large financial institutions, many letters of credit which previously satisfied this criteria will no longer do so.
With the reduction in the number of financial institutions which meet this criteria, could this be the end of Type C contingent assets for PPF purposes?
Jessica Kerslake is a senior associate at Allen & Overy LLP.Print This Post