DBRS reports that the Selkirk Funding Trust, one of the asset-backed commercial paper issuers it rates, is having liquidity issues.

The rating agency maintains its ratings “Under Review with Developing Implications”, where they were placed on August 16. On August 20, DBRS reports that it received notification that Selkirk was unable to fund maturing asset-backed commercial paper.

As part of the notification procedure to the liquidity provider, Selkirk requested that DBRS confirm the applicable outstanding rating, which was done by DBRS on the basis of the underlying credit quality of the assets held by Selkirk.

As of the close of business on August 20, DBRS had not yet received notification that Selkirk was in receipt of funds from its liquidity provider in response to the funding request. Failure to receive funding in a timely manner through the placement of ABCP or funding under the liquidity facilities may result in an event of default under the ABCP issuers’ trust indenture after applicable grace periods have expired, it says.

Given the failure to roll of numerous ABCP issuers last week, it may be difficult for Selkirk to roll ABCP in the future, it warns.

In addition, on August 20, DBRS became aware of certain events that took place on August 17, related to Selkirk that may require that additional funding be provided for Selkirk by no later than August 22, upon the satisfaction of certain conditions precedent to the requirement. “Failure to meet such additional funding requirements by this date may result in adverse rating action with respect to the Series A, Class A Notes,” it says. “Subject to a grace period, failure to provide such funding may also result in an event of default in addition to any event of default that may be triggered by non-payment of the Series A, Class A Notes.”

DBRS says it is of the opinion that these assets continue to be strong from a credit perspective and have a AAA probability of default. “However, despite the AAA probability of default, the unremedied occurrence of an event of default would result in an unwinding of the underlying credit default swap,” it says.

“It is DBRS’s understanding that in today’s volatile credit environment, mark-to-market losses under such a scenario would be substantial,” it warns, adding, “Some of the scenarios and timelines described here are unique to Selkirk, as Selkirk indicated recently to DBRS that it did not wish to be part of the Proposal for Third Party ABCP Conduits.”

DBRS says it continues to monitor the situation closely and will be issuing additional comments as the situation develops.