DBRS Publishes Final Methodology on European Small and Medium-Sized Enterprise CLOs

DBRS Ratings Limited (“DBRS”) has today published an updated version of the methodology it uses to rate and monitor collateralised loan obligations (“CLOs”) backed by loans to European Small and Medium-Sized Enterprises (“SMEs”). The updated methodology includes one document, “Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)”.

This methodology update follows the conclusion of the Request for Comment period on 30 September 2013. Comments received during the Request for Comment period, as well as DBRS responses, have been published to the DBRS website, except in cases where confidentiality was requested by the respondent. These comments and responses can be located at http://www.dbrs.com/research/261653/comments-and-dbrs-responses-for-clos-backed-by-loans-to-european-smes-request-for-comments.pdf. No material changes were made to the final methodology as a result of the comments received during the Request for Comment period.

This methodology, effective today, supersedes the previous “Master European Granular Corporate Securitisations (SME CLOs)” published 14 June 2011 and the “Small and Medium Enterprise Loans” section of the “Master European Structured Finance Surveillance Methodology” published 5 December 2012.

Compared to the previous methodologies, the updated methodology (a) updates correlation assumptions, including a new “DBRS Diversity Model” that replaces the “DBRS Large Pool Model”, (b) brings recovery assumptions in line with those used in the large corporate credit CDO (for loans not secured by real estate) and EU RMBS (for loans secured by real estate) methodologies, (c) clarifies the methods of computation of the portfolio annualised probability of default, and (d) incorporates the current DBRS Idealized Default Table (“IDT”).

The updates incorporated in this newly published methodology constitute a material change to the previous methodology. The implications for outstanding ratings will vary based on the following factors: (a) correlation, generally positive; (b) recoveries, generally positive for real estate collateral, and developing or negative for unsecured collateral; (c) portfolio annualised default rate, developing; and (d) incorporation of the DBRS IDT, developing. The impact of the new methodology on existing ratings will be published separately.

DBRS criteria and methodologies are publicly available on its website www.dbrs.com under Methodologies. For more information on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS's rating definitions and the terms of use of such ratings are available at www.dbrs.com.