# GCR Publishes Multiple Updated Structured Finance Rating Criteria

## GCR Publishes Multiple Updated Structured Finance Rating Criteria

Johannesburg, 30 November 2018—Global Credit Ratings Co Limited (“GCR”) has published the following eight updated Structured Finance Criteria:

  * Global Asset-Backed Commercial Paper (ABCP) Rating Criteria
  * Global Credit-Linked Note (CLN) and Repackaging Vehicle (Repack) Rating Criteria
  * Global Collateralised Loan Obligation (CLO) Rating Criteria
  * Global Commercial Mortgage Backed Securities (CMBS) Rating Criteria
  * Global Project Finance Rating Criteria
  * Global Residential Mortgage Backed Securities (RMBS) Rating Criteria
  * Global Structurally Enhanced Corporate Bonds Rating Criteria
  * Global Trade Receivables Securitisation Rating Criteria.



There are no significant amendments to the above Criteria. However, the wording of the Criteria related to the Global ABCP Rating Criteria, the Global CLN and Repack Rating Criteria and the Global CLO Rating Criteria have undergone a minor amendment to specify the scope of ratings that can be used by GCR to assign a rating under these asset classes.

The update of these Criteria will not have an impact on any existing transactions that have been rated under them. Going forward, all new transactions will be rated using these updated Criteria.

The Global ABCP Rating Criteria is an update to the version published in November 2017 and applies to short-term debt, issued on a discount or interest-bearing basis, with a maturity not exceeding 364 days. Therefore, ABCP programmes are accorded a short-term rating, which reflects the short-term exposure to default of the rated entity and its capacity to meet its financial obligations within a 12-month period. This is achieved by analysing (i) the conduit and transaction structure, (ii) the capabilities of the sponsor and administrator as well as an analysis of the sponsor’s investment guidelines and (iii) an analysis of the underlying collateral.

The Global CLN and Repack Rating Criteria is an update to the version published in May 2017 and applies to notes issued, mainly by corporates or financial institutions, that rely upon the performance of one or more underlying counterparties (the “Reference Entity or Reference Entities”). These notes are characterised by a lack of credit enhancement and hence, a default of any Reference Entity or its failure to perform its obligations on the qualified investments or underlying security can lead to a default on the Notes. If no such credit event occurs it is expected that a CLN will be redeemed in full upon its maturity date.

The Global CLO Rating Criteria is an update to the version published in September 2017 and applies to transactions comprising granular and diverse pools of assets, typically loan obligations, from small and medium sized enterprises. The majority of CLO transactions are managed by a Collateral Manager, therefore an assessment of the Collateral Manager is crucial, as the Collateral Manager may buy and sell assets in / out of the transaction subject to documented covenants.

The Global CMBS Rating Criteria is an update to the version published in May 2017 and aims to summarise how GCR assesses credit risks within CMBS transactions globally (excluding the USA). The approach looks to analyse the risk of the underlying collateral on a loan by loan basis, the transaction structure, operational risk and counterparty risk, amongst others. GCR analyses the performance of the underlying real estate that acts as collateral. This is done through the review of the stability and generation of income flows, asset quality, tenant profile, marketability of the property and future expected income over the property’s economic life. A cash flow analysis is also run to determine how projected rental flows are applied in the priority of payments for the loan on each payment date.

The Global Project Finance Rating Criteria is an update to the version published in September 2017 and applies to the long-term financing of assets that are for a single-purpose, and are structured so that they are non-recourse to the project owner or any other party. Project Finance structures rely on various contracts to be in place to manage risk during construction and operating periods. GCR applies a scorecard approach as a guideline, which may be weighted towards certain factors and notched up or down for certain structural deficiencies or enhancements as well as mitigated or unmitigated risks. The final rating may be notched up or down, or cross into another rating category.

The Global RMBS Rating Criteria is an update to the version published in May 2017 and aims to summarise how GCR assesses credit risks within RMBS transactions globally (excluding the USA). The approach looks to analyse the risk of the underlying collateral on a loan by loan basis, the transaction structure, operational risk and counterparty risk, amongst others. There will be a key focus on understanding the originator’s underwriting processes and procedures, as well as the servicer’s ability to manage the portfolio. GCR will also perform an analysis of the historical performance of the lender’s loan book, as well as a loan-by-loan analysis of the portfolio. A cash flow analysis will be carried out to determine the ability of the structure and assets to sustain various rating scenarios.

The Global Structurally Enhanced Secured Bonds Rating Criteria is an update to the version published in November 2017 and applies to senior securities issued by corporates that benefit from structural enhancements such as cash reserves, guarantees or transaction specific security packages. The rating of the bonds incorporates recoveries potentially arising from the structural enhancements and is derived by applying a notching approach, starting from the long term, corporate credit rating of the issuer of such bonds. Where relevant, the credit quality of the transaction parties facilitating structural enhancements (e.g. a guarantee) relating to the transaction is considered and, in some instances, dependent upon the rating of the underlying corporate, the rating of the secured obligation may be capped.

The Global Trade Receivables Securitisation Rating Criteria is an update to the version published in May 2017 and details GCR’s approach to rating trade receivables-backed securitisations. GCR analyses the legal and structural issues as well as the operational capabilities of all key transaction parties in determining the appropriateness of credit enhancement provided before according a rating to a trade receivables transaction. Enhancement is driven by asset performance, granularity of the underlying obligors and dilution. GCR will also review the originator/servicer and the underlying collateral/obligor characteristics.

The updated Criteria are available at http://www.globalratings.net.

**ANALYTICAL CONTACTS**

**Primary Analyst**

Yohan Assous

Sector Head: Structured Finance Ratings

+27 11 784 1771

.(JavaScript must be enabled to view this email address)

**Committee Chairman**

Eyal Shevel

Sector Head: Corporate & Public Sector Debt Ratings

+27 11 784 1771

.(JavaScript must be enabled to view this email address)

**RATING LIMITATIONS AND DISCLAIMERS**

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: **http://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS**. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: **http://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS**. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT **http://GLOBALRATINGS.NET**.

**_GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S STRUCTURED FINANCE GLOSSARY_**

Administrator | A transaction appointed agent responsible for the managing of a Conduit or a Special Purpose Vehicle. The responsibilities may include maintaining the bank accounts, making payments and monitoring the transaction performance.  
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Asset | An item with economic value that an entity owns or controls.  
Bond | A long term debt instrument issued by either: a company, institution or the government to raise funds.  
Cash Flow | A financial term for monetary changes in operations, investing and financing activities.  
Collateral | An asset pledged as security in event of default.  
Collateralised Loan Obligation | Junior tranches (that have a higher degree of default risk) of a securitisation transactions that have been repackaged into separate debt securities (according to their degree of risk) that utilise credit-enhancement techniques to mitigate the risk. A CDO is created to distribute the prepayment risk amongst different classes of Notes.  
Commercial Mortgage Backed Securities | Securitisation: debt securities issued by a securitisation vehicle. Backed (collateral) by mortgage loans secured by income producing commercial real estate. (Hotels, Office buildings, Apartments, Industrial, Shopping Centres, Hospitals).  
Commercial Paper | A debt security of short term nature, less than a year.  
Conduit | A commercial lending entity that is established to purchase assets to securitise.  
Corporate Credit Rating | A credit rating accorded to a corporate entity.  
Covenant | A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.  
Credit | A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company  
Credit Enhancement | Limited protection to a transaction against losses arising from the assets. The credit enhancement can be either internal or external. Internal credit enhancement may include: Subordination; over-collateralisation; excess spread; security package; arrears reserve; reserve fund and hedging. External credit enhancement may include: Guarantees; Letters of Credit and hedging.  
Credit Rating | An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.  
Credit Risk | The probability or likelihood that a borrower or issuer will not meet its debt obligations. Credit Risk can further be separated between current credit risk (immediate) and potential credit risk (deferred).  
Debt | An obligation to repay a sum of money.  
Default | A default occurs when: 1.) The Borrower is unable to repay its debt obligations in full; 2.) A credit-loss event such as charge-off, specific provision or distressed restructuring involving the forgiveness or postponement of obligations; 3.) The borrower is past due more than X days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.  
Dilution | A reduction in the amount of trade receivables due to: credit notes; returned goods, faulty goods et cetera.  
Exposure | Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.  
Guarantee | An undertaking for performance of another’s obligations in event of default.  
Income | Money received, especially on a regular basis, for work or through investments.  
International Scale Rating LC | International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.  
Issuer | The party indebted or the person making repayments for its borrowings.  
Lender | A credit provider that is owed debt obligations by a debtor.  
Loan | A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.  
Long-Term Rating | A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.  
Market | An assessment of the property value, with the value being compared to similar properties in the area.  
Notching | A movement in ratings.  
Obligation | The title given to the legal relationship that exists between parties to an agreement when they acquire personal rights against each other for entitlement to perform.  
Obligor | The party indebted or the person making repayments for its borrowings.  
Originator | An entity that created assets and hold on balance sheet for securitisation purposes.  
Payment Date | The date on which the payment of a coupon is made.  
Property | Movable or immovable asset.  
Real Estate | Property that consists of land and / or buildings.  
Receivables | General term for economic benefit derived from an asset.  
Recourse | A source of help in a difficult situation.  
Rent | Payment from a lessee to the lessor for the temporary use of an asset.  
Repack | Rearrangement of securities with the intent to be more attractive for investment. Junior tranches (that have a higher degree of default risk) of a securitisation transactions that have been repackaged into separate debt securities (according to their degree of risk) that utilise credit-enhancement techniques to mitigate the risk. A CDO is created to distribute the prepayment risk amongst different classes of Notes.  
Reserves | A portion of funds allocated for an eventuality.  
Securities | Various instruments used in the capital market to raise funds.  
Securitisation | Is a process of repackaging portfolios of cash-flow producing financial instruments into securities for sale to third parties.  
Security | An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.  
Security Package | Security offered to Noteholders for debt securities issued that should increase the recoveries in an event of default.  
Senior | A security that has a higher repayment priority than junior securities.  
Servicer | A transaction appointed agent that performs the servicing of mortgage loans, loan or obligations.  
Short-Term Rating | A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.  
Structural Enhancement | This may be provided as credit enhancement or as various other methods to enhance the security of a transaction such as performance triggers, short revolving periods et cetera.  
Trade Receivables | A legally enforceable claim for payment to a business by its customer or clients for goods supplied and or services rendered in execution of the customer’s order.  
Transaction | A transaction that enables an Issuer to issue debt securities in the capital markets. A debt issuance programme that allows an Issuer the continued and flexible issuance of several types of securities in accordance with the programme terms and conditions.  
Weighted | The weight that a single obligation has in relation to the aggregated pool of obligations. For example, a single mortgage principal balance divided by the aggregated mortgage pool principal balance.  
International Scale Rating LC | International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.  
Long-Term Rating | A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.  
Short-Term Rating | A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.  
  
For a detailed glossary of terms please click  _here_