Scope Ratings today published its SME CLO Rating Methodology and calls for comments from market participants by 30 April 2015. The proposed methodology applies to securitisations of portfolios of small- and medium-sized enterprises (SMEs). It proposes a holistic, forward-looking rating framework that allows for transparent differentiation of credit risk.

Methodology Highlights

Crisis-proven rating stability. Scope has incorporated the lessons from the last financial crisis by means of forward-looking and through-the-cycle base-case assumptions, providing more rating stability in particular for high investment-grade ratings.

No mechanistic link to sovereign credit quality. Scope believes that the credit assessment of a sovereign is not an adequate anchor for a rating cap, particularly in Eurozone countries. Rather, the agency considers factors like macroeconomic development, institutional meltdown and convertibility risk in the monetary and political context where a transaction originates, as well as the tenor of each rated tranche.

Post-crisis counterparty risk. New bank recovery and resolution regimes created after the recent financial crisis have softened the risk to securitisations originated by financial institutions acting as account banks or servicers. This has enabled us to review the rating thresholds covenanted in the past for such parties.

Transparent differentiation. Rather than applying a one-size-fits-all approach, Scope uses fundamental bottom-up analysis on different asset types, portfolios or structural characteristics. This allows for larger rating differentiation amongst ratings of transactions from the same country, or even the same originator.

Originator analysis. Scope leverages the knowledge banks have of their customers when it forms a credit view of the assets. Scope’s financial institution analysts support the structured finance team in understanding the business model of the bank and providing perspectives on portfolio default and recovery assumptions.

Efficient and flexible rating process. Scope can work with data templates provided by the originator, thus eliminating data management redundancies and increasing the efficiency of the overall process.

Scope SF ratings assigned to SME CLO securities reflect the expected loss for the investor on a securitisation note in the context of the expected weighted average life of the investment. The expected loss accounts for the time value of money at the rate promised by the instrument to the investor.

Scope’s SME CLO Rating Methodology complements the Structured Finance Instruments Methodology Guidelines, dated July 2014. The publication of this methodology does not have any rating implication on outstanding SME CLO ratings by Scope.

Scope invites issuers, investors and other interested parties to comment on the methodology by 30 April 2015, as part of the agency’s ongoing commitment to open dialogue with market participants.
Please send your comments to service@scoperatings.com

Scope will review market participants’ comments on the proposed methodology and will publish the final version of this rating methodology report thereafter.

The “SME CLO Rating Methodology – Call for Comments” is available at www.scoperatings.com or by clicking on the link below.

Analyst Conference Call
On Thursday, 19 March, at 16:00 CET Scope Ratings will hold a telephone and web conference to present and discuss its new SME CLO rating methodology. The discussion will be lead by Carlos Terre, Executive Director of Scope's Structured Finance team. To register

Download the proposed SME CLO Rating Methodology