Scope Ratings today published its final Auto ABS Rating Methodology. The methodology applies to securitisations of granular portfolios of loans or leases that finance new or used vehicles. The report first describes the analysis of auto ABS which securitise only lease or loan instalments, and it subsequently explains the analysis of residual value and voluntary termination risks, making it a general framework that can be applied to any auto loan or lease transaction.

The final methodology is substantially the same as the proposed methodology published as call-for-comments on 15 July 2016.

Methodology highlights

Larger differentiation. Scope’s analysis relies on input assumptions which are transaction-specific. Scope uses a fundamental bottom-up approach to capture the credit and market risks of different characteristics related to the assets, portfolio or structure, all of which are considered in the context of the originator and the relevant jurisdiction. Scope sequentially analyses these elements in a framework created by legal and counterparty considerations. This approach allows for larger rating and transaction differentiation, even when considering transactions by the same originator and in the same country.

Comprehensive framework. This methodology defines a comprehensive analytical framework for rating auto ABS securitisations exposed to credit risk; credit and residual value risk; or credit, voluntary termination and residual value risk (i.e. characteristic of auto ABS transactions in the UK).

Originator analysis. Scope leverages on the originator’s knowledge of its customers and the new/used auto markets. We analyse the market positioning, product portfolio, origination strategy, risk management and monitoring, and recovery functions to provide the qualitative framework to build an informed credit view of the assets.

Highly granular approach. Scope analyses auto ABS portfolios, under the assumption of high granularity, using the historical performance references of defaults and recoveries in the form of vintage data sets. The analysis of simple and transparent auto ABS is straightforward, involving the modelling of portfolio losses and cash flow distributions.

No mechanistic link to sovereign credit quality. Scope does not mechanistically limit the maximum rating a securitisation can achieve as a function of the sovereign credit quality of the country of the assets. Instead, we assess convertibility risk and the risk of institutional meltdown in the context of the tenor of each rated tranche, as well as factor macroeconomics into the ratings.

Stable senior protection. The methodology promotes stable protection buffers through the cycle for AAA_SF ratings. We focus on a long-term view, complemented by market performance references for the specific country, to reduce the distortions of the protection levels resulting from volatility of default rates over an economic cycle which is significant for the relevant jurisdiction.

Scope structured finance ratings assigned to auto ABS 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 Auto ABS Rating Methodology complements the General Structured Finance Rating Methodology and should be read with the Methodology for Counterparty Risk in Structured Finance. The publication of this methodology does not have any rating implication on outstanding ratings by Scope.

Download the methodology here or from www.scoperatings.com.