DBRS Publishes Updated Canadian Credit Card Methodology

DBRS has today released its updated methodology for rating Canadian credit card securitizations. The publication of this methodology is part of DBRS’s continued effort to provide market participants with updates and insight into the rationale behind DBRS’s rating opinions.

This methodology updates the following sections and maintains intact the essence of the analytical approach that DBRS takes to rating credit card securitizations in Canada:

Interchange: DBRS recognizes that certain Canadian credit card portfolios generate high interchange yield in the range of 7% to 9% due to the strong monthly payment rate. A strict interchange removal to determine the base case for the yield is considered overly conservative and punitive for such portfolios. The methodology will adjust credit for interchange by rating categories and the sellers’ ratings. For example, the lower the note rating or the higher the seller’s rating, the larger availability of the interchange yield is considered.

Stress period for subordinated notes: DBRS applies stress multiples for credit card performance deterioration in respect of yield, monthly payment rate and loss rate simultaneously, eventually resulting in the beginning of the amortization period. However, empirical experience has shown that when a credit card program enters into early amortization due to adverse performance, the payment rate and loss rate deteriorate drastically in a short period but yield tends to remain relatively stable. As DBRS’s assumption of simultaneous performance deterioration is more severe than empirical experience, subordinated notes may be stressed more leniently with a stress period longer than 12 months. There is no change to the stress period of 12 months for AAA(sf) rated notes.

Rating designation: The methodology uses the following guidelines to assign (high) or (low) rating designations to credit card notes: if a rated class can pass the higher than mid-range stress multiples, a (high) rating designation may be assigned. On the other hand, if a rated class can only pass the lower than mid-range stress multiples, a (low) rating designation will be considered by DBRS.

Surveillance: The methodology enhances DBRS surveillance approach by stress testing each rated class through the cashflow model at least once a month, in addition to trend analysis of the key portfolio performance variables. At least six scenarios will be run for each rated class on an ‘as is’ basis without assumptions made for the past performance. More detailed review of select portfolios will be conducted if necessary.

The methodology also consolidates the various criteria issued by DBRS, such as partial commingling conditions, since the last methodology for Canadian credit card securitization was published in October 2008.

Each DBRS rating is based upon an analysis of the underlying assets, the transaction parties, the legal and funding structure, and the available credit enhancement. These considerations are assessed under various stress scenarios to ensure that commensurate enhancement is available to each rating assigned. DBRS has tested all existing Canadian credit card notes between March 2010 and June 2010 based on the above changes and took no rating action as a result of the updated criteria.

Media Contact:
Caroline Creighton
Senior Vice President - Communications
+1 416 597 7317
ccreighton@dbrs.com