Scope Ratings has today published its final Consumer ABS Rating Methodology. The 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 companies. The methodology describes the general framework for analysing consumer ABS and explains the specific steps taken in the analysis of Italian securitisation transactions of payroll-deductible cessione del quinto and delegazione di pagamento (CQS) loans.

Download the Consumer ABS Rating Methodology.

Methodology highlights

Greater credit differentiation. Scope’s analysis relies on transaction-specific input assumptions. The agency 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 can be applied 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 vintage default data from the originator.

Originator analysis. Scope leverages on the originator’s knowledge of its customers. The agency analyses market positioning, product portfolio, origination strategy, risk management and monitoring, and recovery functions in order to establish 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 where the assets were originated. Rather, Scope’s 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 protection is in place.

Stable senior protection. The methodology provides stable protection buffers through the cycle for AAA_SF 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 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 the cash flows generated by CQS loans. Scope takes into account the ultimate recourse to the consumer paying 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 as a further source of recoveries.

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 measuring 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 its General Structured Finance Rating Methodology and should be read together with Counterparty Risk in Structured Finance. The publication of this methodology does not have any rating implications for outstanding ratings by Scope.

 The Consumer ABS methodology is available here or at www.scoperatings.com.