DBRS Releases Appendices to Canadian SF Methodology for Personal Lines of Credit and Consumer Loans

DBRS has today released appendices to its methodology Rating Canadian Structured Finance Transactions. These appendices will apply to (i) personal lines of credit (PLCs), both secured and unsecured, and (ii) unsecured consumer loans.

PLCs are revolving loans with a credit limit, similar to credit cards. Transactions typically incorporate a revolving period, where principal receipts are re-invested in additional receivables, an accumulation period where principal receipts are accumulated in a trust account and an amortization period where principal receipts are used to pay down the notes after amortization triggers are breached.

For cash flow analysis, DBRS will examine historical data of PLC loans to determine a base case for three key performance metrics – asset yield, payment rate and default rate – and stress the base case to scenarios commensurate with each rating level. For PLCs with sufficient recovery data and value, DBRS will further consider recoveries and appropriate time lags. The cash flow analysis will incorporate all of the elements of the transaction structure, including any triggers, covenants or hedges. Due to the similarity of PLCs and credit cards, the stress multiples applied in PLC transactions are identical to those applied in credit card transactions.

Consumer loans are unsecured, amortizing loans with scheduled, equal payments. In a typical transaction, principal payments are passed through to reduce outstanding notes and excess spread is released to the seller. Upon a lock-up or termination event, excess spread is retained in the transaction, either trapped in a cash account or used to pay down the notes.

For cash flow analysis, DBRS will examine historical data to determine (i) a base case for cumulative defaults or losses, (ii) default and loss timing, and (iii) prepayment speed, and will subject the base case to stress scenarios commensurate with each rating level. For consumer loans with sufficient recovery data and value, DBRS will further consider recoveries and appropriate time lags. The cash flow analysis assumes different scenarios of default and loss timing and prepayments and incorporates all of the elements of the transaction structure, including any triggers, lock-up events, termination events, covenants or hedges. Due to the amortizing nature of consumer loans, the stress multiples applied are similar to those used for consumer loans with scheduled payments, such as auto loans and are set in the same ranges as those for PLC transactions.

The methodology providing DBRS’s processes and criteria are available by contacting us at info@dbrs.com.