Northern Rock has requested that Moody's assess the impact on the ratings of the notes issued out of Granite Master Issuer, following the replacement of the swap counterparty for the outstanding euro-denominated notes in the Granite Series 2006-4 transaction. Goldman Sachs Mitsui Marine Derivative Products has replaced Banque AIG as euro currency swap provider on the deal's Class A7, Class B3 and Class M3 notes, while Goldman Sachs Bank USA becomes euro currency swap provider on the Class C3 notes.

In Moody's opinion, the swap counterparty replacement is rating positive due to the higher long-term rating of the new swap providers compared with the outgoing swap provider. However, the note ratings continue to be linked to the swap counterparties' ratings.

There is credit exposure to Goldman Sachs Group and Mitsui Sumitomo Insurance Co as guarantors of the swaps. According to Moody's published criteria, the risk of default by a guarantor in relation to swap payments is substantially de-linked from structured finance transactions provided that the swap counterparty is required to take suitable remedial action, following a downgrade of the guarantor below certain rating thresholds, and the performance of such remedial action is irrevocably guaranteed by the guarantor.

In Moody's view, since the parental guarantees relate only to "monetary" obligations, they do not clearly guarantee the swap counterparties' obligations to post collateral. For the same reason, the rating agency believes that these guarantees probably do not cover the swap counterparties' obligations to take steps to find third parties that are willing to act as guarantors or replacement swap providers.

Additionally, as the replacement swap counterparties are US-domiciled, a recent US bankruptcy court decision means it is unclear how long the issuer would have to terminate a swap, should a counterparty be in breach of its obligations. In an extreme scenario this could conceivably lead to the issuer terminating a swap before a replacement is found, although it might be expected that a swift attempt would be made to rectify matters, Moody's notes.

Nevertheless, in the agency's opinion, this swap replacement does not impact the current ratings assigned to any of the Granite notes.