Scope Ratings today published its Consumer ABS Rating Methodology and calls for comments from market participants by 30 December 2017. The proposed methodology applies to European consumer loan ABS for which the collateral consists of granular portfolios of unsecured consumer loans granted to individuals and originated by banks, online lenders or other types of finance company. The proposed methodology describes the general framework for analysing consumer ABS and explains the specific steps in the analysis employed for Italian transactions of payroll deductible (CQS) loans: cession del quinto and delegazione di pagamento loans.

Methodology highlights

Greater credit differentiation. Scope’s analysis relies on transaction-specific input assumptions. Scope uses a fundamental bottom-up approach to capture the different credit and market risks related to assets, portfolio and structure, all of which are considered in the context of the originator and the relevant jurisdiction. This approach allows greater rating and transaction differentiation, even for transactions by the same originator and in the same country.

Wide asset coverage. The methodology applies to a wide variety of unsecured consumer receivables and also Italian payroll deductible loans. For highly granular portfolios, Scope assumes an inverse Gaussian distribution of defaults, using historical data as the starting point, ideally in the form of default vintage data from the originator.

Originator analysis. Scope leverages on the originator’s knowledge of its customers. We analyse market positioning, product portfolio, origination strategy, risk management and monitoring, and recovery functions to build a qualitative framework and form a credit view of the assets.

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 assets origination. Rather, our assessment focuses on convertibility risk and the risk of institutional meltdown in the context of the tenor of each rated tranche, factoring macroeconomics into the ratings.

Post-crisis counterparty risk. Scope applies its understanding of the bank recovery and resolution regimes created after the 2008 financial crisis. Traditional counterparty risk analysis and rating triggers in the context of these new regimes provide significant comfort that roles such as transaction account bank or servicer can be performed by resolvable financial institutions without limiting the highest rating achievable by a securitisation, provided adequate structural protections are in place.

Stable senior protection. The methodology promotes stable protection buffers through the cycle for AAASF ratings. Scope focuses on a long-term view complemented by market performance references for the specific country so as to minimise distortions of protection levels caused by default rate volatility over an economic cycle in the relevant jurisdiction.

The proposed methodology also highlights Scope´s detailed approach to analysing Italian payroll deductible loans. Scope’s approach reflects the multiple layers of protection available to this kind of loan and the potential effects from events not covered by historical data, such as defaults of insurance providers or the sovereign, which may impact cash flows generated by CQS loans. Scope takes into account the ultimate recourse to the consumer who pays the loan by having the instalments directly deducted by the employer from his/her monthly salary, as well as insurance coverage against unemployment and life event risks.

Fundamental analysis of tail events associated with sovereign risk. Scope believes that any protracted suspension of payments affecting a large proportion of civil servants and pensioners constitutes a materially smaller risk than the risk of a sovereign defaulting on public debt, particularly in a country which is part of the euro area such as Italy. Rather than using rating caps, Scope applies a transparent approach to size for risks stemming from a potential sovereign event impacting CQS loans.

Portfolio recoveries reflect insurance risk diversification. Scope’s asset recovery rate assumptions take into consideration the credit quality and diversification of loan insurers present in the pool of CQS loans.

Scope’s Consumer ABS Rating Methodology complements the General Structured Finance Rating Methodology and should be read together with the Counterparty Risk in Structured Finance. The publication of this methodology does not have any rating implication on outstanding ratings by Scope.

Scope invites issuers, investors and other interested parties to comment on the methodology by 30 December 2017, as part of the agency’s ongoing commitment to transparency and open dialogue with market participants.

Please send your comments to consultation@scoperatings.com.

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

Download the proposed methodology here or on www.scoperatings.com.

Analyst Conference Call

Scope Ratings will hold a telephone and web conference to present and discuss its new Consumer ABS Rating Methodology on Thursday, 14th December, at 11:30 am CET. The discussion will be led by David Bergman, Executive Director and Guillaume Jolivet, Managing Director, part of Scope’s Structured Finance team:

Click here to register