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Salomon - MOODYS
Moody's Assigns Aaa Rating to Salomon Swapco Inc.
for Counterparty Risk
Rating Opinion
Moody's has assigned a counterparty rating of Aaa to Salomon Swapco Inc
(Swapco), a special-purpose company, newly created by Salomon Brothers to inter-
mediate U.S. dollar and nondollar interest-rate swaps, cross-currency swaps, inter-
est-rate caps and floors, equity swaps, foreign currency forwards, and options on
these instruments. Swapco, a wholly-owned susidiary of Salomon Brothers Holding
Company (SBHC), will also offer guarantees on transactions entered into by Salomon
affiliates in jurisdictions where Swapco cannot transact directly. Initially, any exposure
to Swapco from guaranteed transactions will be fully covered through Swapco's capi-
tal formula. As legal and regulatory issues are addressed, that exposure will be col-
lateralized by certain Salomon affiliates. The Aaa rating is based on Moody's opinion
of the structural and legal integrity of Swapco and on the adequacy of its capital and
collateral formulas to cover any losses that do occur. Moody's will monitor Swapco's
risk characteristics and the sufficiency of its capital and collateral to ensure that the
assigned rating continues to be consistent with the protections offered to Swapco's
Overview of Salomon Swapco Inc.
As the markets for swaps and other derivative products have experienced rapid
growth in recent years, participants have increasingly focused on the credit quality of
available counterparties. The latest available figures from the International Swap
Dealers Association show growth in the notional value of interest-rate and currency
swaps of 34% in 1990 and 49% in 1991, bringing the dollar value of these contracts
to $3.9 billion. Interest-rate swaps account for roughly 80% of the notional total.
Such rapid growth, however, has been accompanied by a decline in the creditworthi-
ness of major swap dealers, as measured by Moody's ratings. As a result, highly
rated institutions have limited the volume of transactions they enter into with certain
of the commercial banks, investment banks, and insurance firms that deal in deriva-
tive products. The failures of a few entities with sizable swap books in recent years
have heightened concerns about creditworthiness.
Jeremy Gluck, Ph.D.
(212) 553-3698
Senior Analyst
Alan Backman
(212) 553-1037
Associate Analyst
Daniel Curry
(212) 553-7250
Associate Director
Salomon Swapco, Inc.
s Special Comment
March 1993

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