This FAQ summarizes our rating process and highlights some common credit considerations for transactions related to asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) in jurisdictions with no or limited structured finance transactions.

The FAQ covers the main credit issues that can emerge when rating ABS and RMBS transactions that result from differing legal frameworks and transaction objectives. Yet it does not cover all relevant analytical considerations. We generally define a non-established market as a market with no or limited precedent for securitization. Overall, the approach is mostly similar to that for developed ABS/RMBS markets. However, as the markets are not as developed from a securitization perspective, asset performance data, other relevant data, documentation, and legal frameworks are not as standardized, which we need to consider and account for in our analysis.

In addition to relevant asset specific criteria, we also set out below under "Relevant Criteria" the other criteria that would generally also apply when rating ABS and RMBS transactions.

What are the main considerations of ABS and RMBS ratings?

Structured finance ratings comprise five main pillars: the credit quality of the securitized assets, legal and regulatory risks, operational and administrative risks, counterparty risk, and payment structure and cash flow mechanics. We cover each of these pillars in more detail in the appendix. For ease of reference, we categorize the pillars separately, even though they sometimes overlap. For example, we could assess unmitigated set-off risk as a stress factor in cash flow modelling.

How do you determine estimated default and recovery rates in a portfolio?

Our estimate of default and recovery rates (loss rates) depends on the nature of the assets. We have different methodologies for different types of assets. A summary of our approach of each applicable criteria article for the main asset classes we tend to see is in the appendix under "Credit quality of the securitized assets." If proposed transactions include an asset type that is not covered by our existing criteria, they may still be rateable. Generally, this is done by leveraging methodological concepts embedded in other criteria, or by "Rating to Principles": the process of developing methodology and key assumptions to determine a rating when such credit rating is based mostly on the "Principles of Credit Ratings" rather than on a specific criterion (see "Principles Of Credit Ratings," Feb. 16, 2011).

What is the maximum possible rating?

The maximum possible rating will be driven by the application of relevant criteria. Limitations on the maximum potential rating can become apparent early in the rating process or even before the start of the rating process, based on the information we have about the transaction. An example of this are transaction ratings that are linked to sovereign ratings. Potential limitations to the maximum rating can also result from:

• Specific details of the transaction documentation, for example if transaction documentation relating to counterparty risk does not comply with our current counterparty criteria (see "Counterparty Risk Framework: Methodology And Assumptions," March 8, 2019);
• Qualitative assessments, such as our opinion of the likelihood of finding a replacement servicer if necessary (see "Global Framework For Assessing Operational Risk In Structured Finance Transactions," Oct. 9, 2014); or
• Qualitative assessments of the nature of the assets and analysis of performance data, the asset seller's track record, or origination policies.

We discuss our approach to sovereign risk in ABS/RMBS transactions in more detail below.

Can you rate ABS and RMBS transactions above the sovereign?

Yes, in certain situations. The number of notches above the sovereign rating depends on multiple factors, including the nature of the assets and the sovereign rating. Generally, if we view the credit performance of the assets as closely linked to that of the sovereign, the maximum number of notches above the sovereign rating will be lower than it otherwise could be. Our approach to rating above the sovereign is detailed in "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published Jan. 30, 2019.

Can the sovereign affect the analysis in other ways?

Yes, transfer and convertibility (T&C) risk may also affect the rating. T&C risk is the risk of a sovereign restricting non-sovereigns' access to foreign currencies that are necessary to satisfy non-sovereigns' debt service obligations. T&C risk usually emerges when the assets or liabilities of a transaction are denominated in a currency other than the currency of the country were the assets are domiciled. We capture T&C risk in our T&C risk assessment of a sovereign. Unless structurally mitigated, we tend to limit ratings at the T&C assessment of the sovereign.

How many notches above the rating on the seller/originator can you rate?

Securitization aims to delink the credit quality of assets from that of asset sellers. This means ABS and RMBS ratings that are above the ratings on the asset sellers are common. Many asset sellers are not rated but the transactions they originate could be able to achieve high investment-grade ratings. Ultimately, the achievable rating is a product of the five pillars of structured finance ratings and other considerations, such as the rating on the sovereign.

What are the differences between global, regional, and national scale ratings?

A national scale credit rating is an opinion of an issuer's or issue's creditworthiness, relative to other issuers and issues in a given country. We can assign national scale ratings to entities domiciled in the country or to non-domestic entities issuing in the country. National scale credit ratings can provide a wider range of credit quality indicators than global scale ratings, particularly in jurisdictions where sovereign ratings limit the possible range of global scale credit quality. In addition, national scale credit ratings can incorporate local market practices and local credit and regulatory considerations.

We can also assign regional scale credit ratings. Regional scale credit ratings represent a relative rank order of creditworthiness within a region. However, national or regional scale credit ratings in a given country or region are not comparable with global or other national scale ratings.

The analytical process for national or regional scale credit ratings initially involves rating a transaction on the global scale and then converting the global scale credit rating to a regional or national scale credit rating (see "National And Regional Scale Credit Ratings Methodology," published June 8, 2023, and "S&P Global Ratings' Definitions," published Oct. 15, 2024). Some countries already have predefined mappings. For those that do not, we apply the methodology outlined in "National And Regional Scale Credit Ratings Methodology."

How long does it take to rate a transaction and what does the typical rating process look like?

The time it takes to execute a rated transactions can vary. Shorter timelines tend to apply to jurisdictions with existing private securitization markets and/or where sellers have gained institutional experience in securitization in other jurisdictions. For reference, the rating process for ABS and RMBS transactions in established markets with regular issuers typically takes 5-8 weeks for a repeat issuer with good information flow. Given the novelty of ABS/RMBS issuance in the jurisdiction and the number of parties involved, it can often require large amounts of time to resolve any issues or questions that arise. The number of parties that are involved in the establishment of a securitization issuer is significant. Below is a list of other roles that we would typically see.

• Originator/seller
• Issuer
• Accountancy firm
• Corporate service provider
• Servicer
• Structuring advisor/bank (also referred to as the arranger)
• Syndicate bank
• Trustees
• Lawyers. Most participants in the transaction, including the arranger and the seller/originator, will engage their own separate legal counsel.

Furthermore, compared with regular originators/sellers in established markets, debut originators/sellers in non-established markets usually require more time to prepare performance data and, if necessary, loan level data. Similarly, given the lack of precedent transactions, the preparation of transaction documents and legal opinions, as well as their reviews, also take longer, given the limited number of predecessor transactions. Other factors that could lengthen the overall rating process include, but are not limited to, the language the transaction documents are written in, the number of counterparties to the transaction that are required to review the transaction documents, and the legal framework of the country the issuer is based in.

What data do asset sellers have to provide?

The data we need depend on the assets. We analyze RMBS transactions on a loan-by-loan basis of the securitized pool. For consumer ABS transactions, we establish a base-case default rate and then apply rating-category specific multiples to the base case. The base case is formulated following an analysis of performance data and underwriting policies. We have loan-by-loan data templates for RMBS transactions and can share an indication of the type of data that we will likely need beforehand. It is important to note that there is a diverse range of ABS asset types and for certain transactions, for example data centres and music royalties, the analytical approach and data requirements may differ.

How much performance data do you need?

The maximum potential ratings may be constrained, based on the nature of performance data available. We generally need data on default rates, losses, and prepayments. We do not require these data in a specific template but can leverage data that the asset seller already produces for their own internal purposes. Generally, this should span a meaningful timeframe, which, for guidance, is often considered to be 36 months of origination.

How is the structure determined?

We test the structures that are proposed to us by the parties that are arranging the transaction and assess them in accordance with the relevant methodologies. As part of the rating process, we will supply default and loss expectations by rating category, following our analysis of the "Credit quality of the assets" pillar. These can be used as an input by structuring advisors, together with other assumptions, to propose a capital structure to us that we can test.

How are liability guarantees factored into the rating outcome?

We consider any guarantees in accordance with our guarantee criteria (see "Guarantee Criteria," published Oct. 21, 2016) to assess whether we can consider in our rating analysis the creditworthiness of the guarantor instead of the primary obligor (the guaranteed entity). Depending on the rating on the guarantor, the overall rating outcome could therefore be higher than it would be without the guarantee, all else being equal.

How is support from government-related entities (GREs) factored into the rating outcome?

We would consider any support from a GRE based on our "Rating Government-Related Entities (GRE): Methodology And Assumptions Criteria," published March 25, 2015. The criteria defines what a GRE is and outlines the considerations that define if, and how much, credit could be given to the GRE.

Is it possible to gain an understanding of whether a transaction is rateable prior to engagement?

To some extent, it is. Red flags on whether a transaction can achieve a certain rating can become apparent after a pre-engagement review of a transaction's structure and term sheet, relative to our publicly available criteria. For example, we would not rate an ABS/RMBS transaction at 'AAA(sf)' if the assets are domiciled in a jurisdiction whose sovereign rating is at or below 'B-' (absent any guarantee or other mitigant). That said, some factors that may affect rateability may only become apparent during the rating process. If general concerns about the legal framework within a jurisdiction exist, we can review legal memos by an external counsel in our pre-engagement analytical discussions and gain a high-level understanding on how the issuer could address certain analytical concerns.

Appendix: The Five Pillars

1 – Credit quality of the securitized assets

General:  The first step in analyzing the credit quality of securitized assets is determining the amount of losses that a pool of assets could suffer at various rating levels. The estimate of losses indicates the level of credit support needed at each rating level (absent any consideration of structural mechanisms). Generally, the estimate of losses is the product of the estimated default rate and the estimated loss severity of assets that default. Our default and loss estimates inform our analysis of the payment structure and cash flow mechanics.

Common analytical considerations:  RMBS: We use our global residential loan criteria for countries for which we do not have country-specific published criteria. RMBS credit analysis is a loan-by-loan assessment, which aims to establish loan-level- and rating-category-specific default and loss estimates. These loan level values are then weighted by the current balance of each loan, relative to the balance of the overall pool.

The starting point of our RMBS credit analysis is the mortgage market assessment (MMA) of the relevant jurisdiction. The MMA leverages our banking industry credit risk assessment (BICRA) of the jurisdiction and considers historically observed sensitivities to unemployment. The MMA provides a relative risk ranking of mortgage markets across jurisdictions based on macroeconomic and mortgage industry considerations. We then make borrower- and loan-specific adjustments, based on available data that balance international comparability with local market norms.

ABS: Separate ABS criteria--for example for unsecured loans, autos equipment leases --reflect the risks associated with different assets. Generally, and at a high level, we use these criteria to establish a base-case default rate (sometimes referred to as a gross loss) and apply rating-specific multipliers to the base case to assess rating-specific stresses. We then apply rating-specific recovery rates. Note that for certain ABS assets different analytical approaches may be use. Unlike an RMBS credit analysis, an ABS credit analysis is typically not a loan-by-loan analysis.

2 – Legal and regulatory risks

Our assessment of legal and regulatory risks focuses on two main aspects of our criteria:

• Asset isolation: The first is the degree to which a securitization structure isolates the securitized assets (including any cash flows generated by the assets) from being entangled, however briefly, in any insolvency proceedings of the seller. We would look to understand how the applicable insolvency laws in the jurisdiction of the seller determine the effect of an insolvency proceeding on the securitized assets. For example, does the insolvency legal regime impose either a moratorium or some other form of stay on all properties of the entity that are subject to bankruptcy proceedings, which could result in a temporary interruption of cash flows and a delay in repayment? Does the seller's jurisdiction have a well-defined legal regime (or general case law/accepted market practice etc.) that determines conditions and formalities under which a transfer of the securitized assets can take place to achieve a true sale? We consider legal opinions and memoranda from each relevant jurisdiction as to whether a structure achieves assets isolation/true sale of securitized assets that would be recognized in the insolvency of the seller and not be subject to any successful challenge or recharacterization as a secured loan by any creditor or insolvency administrator of the seller.
• Bankruptcy remoteness of the issuer: The second aims to determine if the risk of the issuer entering insolvency proceedings, either voluntary or involuntary, is remote. Although bankruptcy remoteness may not be a legal concept, certain characteristics that are relevant for an analytic determination of bankruptcy remoteness are addressed in the applicable laws of the issuer's jurisdiction. Accordingly, in jurisdictions where the issuer is not immune to insolvency by law, we would look for legal opinions to cover effectiveness through insolvency of some of the characteristics an issuer exhibits, such as limited recourse and non-petition provisions in agreements between the issuer and its creditors, contractual subordination, and issuer security. We would also look to understand the issuer's tax position and exposure to tax liability in other relevant jurisdictions.

Satisfactory legal comfort comes from the application of our "Structured Finance: Asset Isolation And Special-Purpose Entity Methodology" criteria (published March 29, 2017) and from the review of legal and tax opinions. Even if certain legal risks are not or cannot structurally be mitigated, we can assess them by making certain analytical assumptions. For example, we can simulate the estimated effects of set-off loss in our analysis of transaction cash flows.

Common analytical considerations:  As highlighted above, global legal frameworks vary significantly. Consequently, this FAQ cannot cover all risks. We highlight some of the most common risks below.

Set-off risk:  Set-off risk emerges if two parties have cross-claims. A set-off right will allow the parties to net the claims, such that the amounts owing will be the difference. The most common sources of potential set-off risk in ABS and RMBS transactions are deposit set-off and employee set-off.

• Deposit set-off means that mortgage borrowers may be able to reduce the amount they owe to mortgage lenders by the amount the mortgage lenders owe to them. In the case of savings deposits, for example, the mortgage balance could be reduced by the amount of any savings, resulting in a loss for the issuer.
• Employee set-off occurs if loans to employees or asset sellers are included in the securitized asset pool, which could be set off against employees' loan balance if the asset seller becomes insolvent. For example, unpaid wages.

As part of our review, (if applicable) we look for legal opinions to include discussion on set-off (both statutory and contractual) and any applicable waivers or mitigants.

Commingling risk:  Commingling risk may arise if cash belonging to an entity--for example, an issuing special purpose entity--is mixed with cash belonging to a third party--for example, the asset seller or servicer--or is transferred to an account in the name of a third party, so that the cash cannot be separately identified or is frozen in the accounts of the third party if the third party becomes insolvent. This could lead to liquidity shortfalls (the cash will be recovered but not immediately) or a loss (the cash is never recovered). We would look to understand how commingling risk is mitigated either by statute, contractually or structurally with regards to the cash collections received both pre- and post-insolvency.

Clawback risk:  This is a risk of a transfer of ownership of the securitized assets being reversed post-insolvency, with a view to clawing back the securitized assets into the estate of the seller for the benefit of creditors generally.

Clawback legal regimes, the factual circumstances that trigger the applicable clawback rules and any applicable mitigants, vary across jurisdictions. This risk could arise, for example, if transactions are concluded within a prescribed period before the insolvency, or if transactions are preferential. Some jurisdictions' clawback regimes provide specific safe harbors or defenses for certain types of transactions. As part of our review, we look for legal opinions to include clawback discussion as well as conclusions regarding the applicability of any relevant mitigants.

3 – Operational and administrative risks

General:  Operational and administrative counterparties do not hold assets or provide credit or liquidity support that could affect the rated instrument's creditworthiness. For ABS and RMBS transactions, our analysis focuses on the servicer, particularly on two aspects. Firstly, we evaluate a servicer's ability to perform its duties, such as receiving timely payments and pursuing collection efforts on delinquent assets. Secondly, we consider the possibility that a servicer could become unable or unwilling to perform its duties during the life of the transaction. This would require finding a replacement that is both willing and able to step in. Depending on the transaction structure, we would need to analyze other counterparties (see "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published Oct. 9, 2014).

4 – Counterparty risk

General:  Our analysis of counterparty risk focuses on third-party obligations to hold assets, including cash, or make financial payments that could affect the creditworthiness of structured finance instruments. Among others, counterparty risk applies to exposures to institutions that maintain key accounts and exposures to the providers of derivative contracts, such as interest rate swaps and currency swaps. Our counterparty risk analysis considers the type of dependency and the rating on the counterparty for each counterparty relationship in a transaction.

In accordance with our criteria, counterparty risk can be mitigated to the extent that we could rate ABS and RMBS transactions above the counterparty rating. For example, we could rate an ABS/RMBS transaction at 'AAA', even though we rate a reserve fund bank account provider at 'A', if the bank agrees to take remedial action that is in accordance with our counterparty criteria in the case of a downgrade. This scenario assumes no other rating caps (see "Counterparty Risk Framework: Methodology And Assumptions," published March 8, 2019).

5 – Payment structure and cash flow mechanics

General:  Our analysis of the payment structure and cash flow mechanics aims to assess whether cash flows from securitized assets would be sufficient, at the applicable rating levels, to make timely interest payments and ultimate principal payments to the related securities. We take into account available credit enhancements and allow for transaction expenses--such as servicing and trustee fees--and assumed losses at varying rating levels.

Common analytical considerations:  Assessing the payment structure and cash flow mechanics involves running multiple scenarios, which consider the interactions of various parameters that could affect the cash flows the assets are able to generate and how these are distributed according to the priority of payments. Examples of the parameters include, but are not limited to:

• Expected defaults
• Timing of defaults
• Delinquencies
• Expected recoveries
• Timing of recoveries
• Interest rate stresses
• Costs of running the transaction, for example servicing fees, trustee fees, and accountancy fees
• Triggers
• Swap mechanics
• Reinvestment rate stresses

Depending on the jurisdiction, we may have already established assumptions for some parameters. For example, we already calibrated interest rate stresses in the eurozone.

Related Research

• How Much Is Enough? Information Quality Standards For The EMEA RMBS And ABS Rating Process, Jan. 8, 2019

Relevant Criteria

• Global Auto ABS Methodology And Assumptions, July 26, 2024
• Data Center Securitizations: Global Methodology And Assumptions, June 13, 2024
• National And Regional Scale Credit Ratings Methodology, June 8, 2023
• Global Consumer ABS Methodology And Assumptions, March 31, 2022
• Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
• Global Equipment ABS Methodology And Assumptions, May 31, 2019
• Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
• Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
• Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
• Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
• Guarantee Criteria, Oct. 21, 2016
• Rating Government-Related Entities (GRE): Methodology And Assumptions Criteria, March 25, 2015
• Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
• Principles Of Credit Ratings, Feb. 16, 2011