DBRS Clarifies Commingling Policy for Structured Finance Transactions with Revolving Periods

DBRS has today clarified its requirements in relation to the commingling of funds with respect to structured finance transactions with revolving periods (common in credit card and floorplan transactions) where the seller (which generally acts as the initial servicer) no longer meets the rating threshold to permit full commingling of funds during the revolving period.

DBRS’s “Legal Criteria for Canadian Structured Finance Transactions” requires the segregation of trust property, including the remittance of collections by the servicer to a trust account within a short period of time (at most, within three business days of collection), if the servicer is no longer permitted to commingle funds according to the terms of the transaction. DBRS recognizes the flexibility required in certain transactions with revolving periods where collections may need to be used to frequently purchase new receivables until the end of the revolving period. As such, instead of requiring the remittance of all collections on a daily basis (within the allotted time frames) when commingling is no longer permitted under the terms of a transaction, commingling by the servicer of collections in excess of what is required to be paid or deposited for the next distribution or settlement date (partial commingling) may be permitted without any effect on the rating of the transactions, subject to the following conditions:

(1) A daily asset test must be conducted by the servicer in accordance with the terms of the transaction to ensure there are sufficient eligible assets to meet the minimum required amount.

(2) A daily monitoring of the occurrence of any amortization event must be completed by the servicer.

(3) The above two conditions must be certified by an officer of the servicer on a monthly basis, confirming that no amortization event has occurred during that month and that the asset test has been complied with on a daily basis during that month.

If any of the above conditions is not met, the revolving period will end and partial commingling will no longer be permitted. Once the revolving period ends, no commingling of funds will be permitted and all collections will need to be remitted to a trust account within the time frame set out in the terms of the transaction.

In addition, the terms of the transaction must include an amortization event or event of default relating to non-payment by the servicer, and while such non-payment event may have a short cure period (up to three business days), it must not require notice from any party to the transaction in order for the amortization event or event of default to be triggered (this, together with the above conditions, are collectively referred to as the Partial Commingling Conditions).

DBRS believes that the Partial Commingling Conditions will mitigate any potential loss to noteholders that may have resulted from the servicer’s ability to commingle collections in cases where it no longer meets the rating threshold required to fully commingle funds.

To the extent that the Partial Commingling Conditions are not included as terms of existing transactions where partial commingling occurs or is permitted, DBRS expects the Partial Commingling Conditions to be added to the terms of transactions after the date of this release when new series are issued or when existing transactions come up for renewal or are being amended or when the rating agency condition in relation to such transactions must be satisfied.

The clarification outlined in this release will be included in an updated version of DBRS’s “Legal Criteria for Canadian Structured Finance,” which is expected to be published in the near future.

The applicable methodology is “Legal Criteria for Canadian Structured Finance,” which can be found on our website under Methodologies.