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Rating action

The rating action is as follows:

Series 2020-1 notes, USD 1.45bn: assigned rating of AAA_SF

Transaction overview

The transaction is a USD 1.45bn securitisation of trade finance exposures (TFEs) originated by Standard Chartered Bank UK Branch and its subsidiaries Standard Chartered Bank (Singapore) Limited and Standard Chartered Bank (Hong Kong) Limited, hereafter also referred to as ‘the originators’. The three entities are also the transaction’s servicers. The securitised pool is diversified geographically with sizeable portions from Singapore, China, Hong Kong and India and relates to the trade finance obligations of corporates and financial institutions. The securitised pool is exposed to obligors from several industries but has a significant concentration in the banking industry. TFEs relate to short-term trade finance loans provided by the originators to clients involved in their import or export activities.

The transaction’s initial 12-month revolving period can, subject to certain conditions, be extended up to three times for a subsequent 12 months, allowing a maximum revolving period of four years. The revolving period can be terminated upon the occurrence of a stop revolving event.

Rating rationale

The rating reflects the legal and financial structure of the transaction and the credit quality of the portfolio’s underlying exposures in the context of expected macro-economic conditions and the current Covid-19 pandemic.

The notes’ main sources of credit enhancement are overcollateralisation, both at issuance and as required during the revolving phase, as well as available excess spread. A liquidity reserve is also available to address transaction liquidity risk.

The rating accounts for protection provided to the notes by the transaction’s stop revolving events. These include an originator becoming insolvent, the interest reserve falling below the targeted level, overcollateralisation and set-off tests not being satisfied, and defaults in the transaction exceeding a certain level.

Throughout the revolving phase, only eligible assets can be sold by an originator to the related asset funding company (AFC). Eligible criteria include a certain credit grade as determined by Standard Chartered Bank (SCB). Assets purchased from the originators are also subject to replenishment conditions. These include a maximum concentration in the exposure pool in terms of industries, jurisdictions, number of obligor groups, regions, and SCB credit grades, as well as a restriction on the exposure pool’s remaining term, which limits the transaction’s loss horizon.

The notes benefit from a liquidity reserve funded at closing which must be maintained at a targeted level during the transaction’s life. The reserve falling below its target level will trigger a stop purchase event and the notes’ early amortisation. This reserve also mitigates interest rate risk caused by the mismatch between the exposure pool’s fixed interest rates and the floating rate of the notes’ interest costs.

The transaction has no currency risk as all assets and liabilities are denominated in US dollars.

The rating reflects the counterparty risk arising from the significant reliance on SCB entities to perform most of the key transaction roles. i.e. originator, servicer, debtor notification agent of assignment, originator trustee, collection account bank, AFC and issuer account bank, program manager and set-off funder. However, transaction mechanisms are effective at mitigating this risk.

The rating has considered the exposure pool’s strong diversification across multiple jurisdictions in which the originators/servicers also have longstanding experience. The originators/servicers have established underwriting and credit monitoring processes as well as a proactive risk management approach.

Scope has considered the short-term nature of the securitised assets combined with the revolving feature, which exacerbates the risk that the portfolio will migrate significantly from its composition at closing. This risk is mitigated through structure replenishment conditions and eligibility criteria.

Scope’s assessment of the pool’s credit quality involved a mapping between SCB internal credit grades and Scope’s ratings. A single exposure may represent up to 4.99% of the aggregate portfolio and Scope’s analysts validated the mapping exercise by: i) a comparison of the obligors’ SCB credit grades with available public credit ratings on more than 1,000 obligors; ii) the historical performance of SCB credit grades over the last 20 years; and iii) a detailed explanation provided by SCB on how its credit grades were created and currently operate.

Key rating drivers

Positive asset selection (positive)³. The portfolio is positively selected as eligibility criteria excludes, among others, delinquent and defaulted TFEs, TFEs related to government or public sector entities, and TFEs not meeting an SCB credit grade of 1-9.

Experienced originators/servicers (positive)^4,2. The originators/servicers have long lending experience in the main transaction asset jurisdictions (Hong Kong, Singapore, the UK, China, India and South Korea).

Replenishment conditions (positive)³. Replenishment conditions reduce the transaction’s maximum exposure in terms of jurisdictions, obligors’ SCB credit grades and industries as well as dictate a minimum number of obligor groups at the start of the amortisation phase. This is effective at reducing the transaction’s exposure to concentration risk.

Short-term assets (positive)^1,3. Most of the TFEs relate to loans with payment terms of 30-120 days. Therefore, the transaction is exposed to a short loss horizon period, related to losses which can accumulate during the pool liquidation period.

Significant concentration in banking (negative)³. More than half of the pool is concentrated in the banking industry, creating significant sector risk. A replenishment condition caps the concentration to banking, finance, insurance and real estate industries at 53%. Scope’s modelling considered a worst-case pool at the start of the amortisation phase, which assumes the maximum possible exposure to these industries. Moreover, the sensitivity analysis determined the rating impact of a significant increase in standard sector correlation.

Risk of portfolio migration (negative)³. Under certain conditions the transaction could be revolving for up to four years. Associated risks are mitigated through eligibility criteria and replenishment conditions. Scope has modelled the worst-case-portfolio, mostly based on the transaction’s replenishment conditions.

Counterparty concentration risk (negative)³. SCB entities located in the UK, Singapore and Hong Kong perform most of the key transaction roles. These include origination, servicing, collection account bank, AFC/issuer account bank, and set-off reserve funding. Counterparty risk is mitigated by the SCB entities’ high credit quality as well as the transaction’s structural features, which include increased cash-sweeping frequency for collections, a redirection of collections into AFC collection accounts, and the appointment of a back-up servicer and account bank replacement.

Interest rate risk (negative)³. Assets receive fixed interest rates while notes pay a floating rate linked to the one-month US treasury yield. The transaction is exposed to the possibility that the notes’ interest costs increase more than a rise in the pricing of newly replenished loans. This risk is mitigated by the size of the transaction’s dynamic interest reserve, which can cope with any increase on the past three months’ rolling average one-month US treasury yield over the pool’s weighted average yield. The risk is also covered by the combined principal and interest waterfall, under which principal collections could be used to pay timely interest on the notes, and by principal depletion being controlled through a required level of overcollateralisation.

Rating-change drivers

Prolonged government support (positive). Permanent government support to corporate and financial institutions may improve the pool’s credit quality.

Lengthy Covid-19 crisis (negative). A prolonged crisis poses a downside risk to the transaction, which would likely be reflected in increased defaults in the portfolio and a deterioration in sectors to which the transaction has a significant exposure.

Quantitative analysis and assumptions

Due to the short-term nature of the TFEs and consequent rapid-turning nature of the portfolio, Scope has created several theoretical worst-case portfolios. Such portfolios factor in the obligor’s credit grade, country rating and industry maximum concentrations permitted as per the transaction replenishment conditions. Scope has taken into consideration the minimum overcollateralisation guaranteed by the transaction’s stop revolving event. A recovery rate of 10% was considered, commensurate with the rating on the notes. The recovery rate takes into consideration the recovery rates observed in SCB’s past transactions and in the market as well as the limited three-month work-out time available for recoveries. Scope has considered a base case global correlation of 2%, a country correlation of 5%, a sector correlation of 20% and a mean default rate in between 0.32% and 0.41% depending on the worst-case portfolio, which does correspond to an average rating of BB and a pool weighted average life of three months. Scope expects following the end of the revolving period that in three months the portfolio will be fully amortised, based on transaction eligibility criteria and replenishment conditions.

The analysis provided an expected loss and an expected weighted average life for the notes.

Sensitivity analysis

Scope tested the resilience of the rating against deviations of the main input parameters: the portfolio’s mean default rate, sector correlation, weighted average life and recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results change when: i) the portfolio’s expected mean default rate was doubled, ii) the portfolio’s sector correlation was doubled, iii) the portfolio’s sector correlation was tripled for the second largest sector as per the transaction replenishment criteria, iv) portfolio’s sector correlation was doubled only for banking, finance, insurance and real estate industries and v) the portfolio’s weighted average life was increased to five months. In all five sensitivity scenarios, we have lowered the recovery rate to zero.

The sensitivity of the notes is as follows: i) no rating change, ii) two notches, iii) no rating change, iv) two notches and v) no rating change, respectively.

Rating driver references
1. Loan-by-loan datatape of the securitised pool (confidential)
2. Originators’ historical data (confidential)
3. Transaction documents (confidential)
4. Originators’ internal documents and information (confidential)

Stress testing
Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope has primarily analysed the distribution of portfolio losses and its impact on the rated instrument, with the use of Scope Portfolio Model (Model) Version 1.0. This model incorporates the transaction’s structure, including the priority of payments and the support from overcollateralisation. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for this rating were as follows: General Structured Finance Rating Methodology (18 December 2019), CLO Rating Methodology (5 May 2020) and Methodology for Counterparty Risk in Structured Finance (8 July 2020) which are available on https://www.scoperatings.com/#!methodology/list.
The model used for this rating Scope Portfolio Model Version 1.0 is available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s rating was originated from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings GmbH has received a third-party asset audit. The external asset audit was considered when preparing the rating and it has no impact on the credit rating.
Prior to the issuance of the rating action, the rated entity was given the opportunity to review the rating and the principal grounds on which the credit rating is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Miguel Barata, Director
Person responsible for approval of the rating: David Bergman, Managing Director
The rating was first released by Scope on 16 October 2020.
Scope has for the first time rated a transaction backed by a portfolio of trade finance exposures.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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