Moody's Investors Service says cross-currency swaps that mitigate the effect of foreign exchange controls have enabled Moody's to assign ratings above the applicable foreign currency bond ceilings to foreign-currency-denominated covered bonds and securitisation transactions.

"To mitigate the transferability and convertibility restrictions, an offshore swap counterparty typically receives local currency payments from an onshore issuer, and pays the requisite amount of foreign currency into an offshore bank account," says Jose de Leon, a Moody's Senior Vice President and co-author of the report.

"Since the counterparty is located offshore, its payments are not affected by foreign exchange controls that may otherwise prevent the issuer from servicing its foreign currency debt," adds de Leon.

De Leon was speaking on Moody's recently published report entitled, "STRUCTURED FINANCE: The Use of Swaps to Mitigate the effect of Exchange Controls on Covered Bonds and Securitisations." Other co-authors include Edward Manchester, a Moody's Senior Vice President and Joe Wong, a Moody's Assistant Vice President.

According to the report, without structural features that mitigate the effect of exchange controls, the ratings of foreign currency securities are constrained by the applicable foreign currency bond ceiling. The imposition of exchange controls in an issuer's home country may affect its ability to service its foreign currency securities. Exchange controls may also require the issuer to repatriate any foreign currency that it holds offshore.

To mitigate the risk of repatriation by the issuer, the offshore bank account to which the swap counterparty makes its payments is typically under the control of an offshore trustee. Legal arrangements that seek to restrict an issuer's rights as an account holder are governed by an appropriate foreign law rather than the law of the issuer's home country.