DBRS Publishes Final Methodology on Rating Finance Companies

DBRS, Inc. (DBRS) released its updated Global Methodology for Rating Finance Companies (the Methodology or FinCo Methodology). The Methodology is effective as of November 14, 2017.

This update has several important changes from the 2016 edition, but no rating changes are anticipated from its adoption.

Highlights of this updated finance company methodology include:
• Equalization of the weighting allocated to each rating “building block”.
• The introduction of quantitative metrics and associated ranges as inputs for the evaluation of certain rating building blocks, including metrics that address finance companies (FinCos) with unique business models such as business development companies and leasing companies.
• Discussion of DBRS’s consideration of both systemic and internal support for a FinCo.

In this update, the core approach to assessing a FinCo’s intrinsic strength using our five building blocks remains unchanged, but various refinements are introduced to the grids. The range of assessments by building block has also been revised and now comprises: “Very Strong”, “Strong”, “Good”, “Moderate”, “Weak”, and “Very Weak” with “Good” replacing “Satisfactory” and “Moderate” replacing “Passable”. These changes were made to more accurately reflect the characterization of the assessment, as well as to maintain consistency across financial institution methodologies.

Reflecting the interlocking nature of the methodology grid building blocks and the comparable importance of each block in the development of the preliminary intrinsic assessment, the updated methodology now makes it explicit that the blocks are equally weighted. As a result, the Funding & Liquidity, as well as Capitalisation building blocks now receive slightly more weighting in this updated version of the methodology, while the Franchise Strength and Risk Profile building blocks receive modestly less weight in the overall assessment of the FinCo’s intrinsic strength than in the previous methodology. While the revised weightings do result in minor adjustments to the overall assessment for each FinCo in DBRS’s rating universe, and may alter the rank ordering of the FinCos, these adjustments do not result in any immediate change to the ratings.

In addition, in this update, DBRS introduces specific key quantitative metrics for certain building blocks, as well as indicative ranges for use as inputs in the objective assessment of that specific building block using methodology grid sub-factors. This includes the introduction of specific quantitative metrics and indicative ranges for business development companies, as well as lessors. The indicative metrics and ranges derived from historical data and market experience are meant to facilitate improved transparency with the market as to the inputs used in assessing a FinCo’s intrinsic strength and are specifically designed not to be the sole consideration in evaluating the building block and ultimately the rating.

Post-financial crisis, DBRS has a more enhanced approach to the analysis of potential support for FinCos. The previously separate Criteria on Support Assessments is now incorporated in Section IV of the FinCo Methodology. This update provides more clarity on how DBRS approaches both systemic support and internal support for FinCo’s operating within large non-bank corporates or banking organisations.

This update of the methodology also includes a streamlined Appendix that includes the DBRS approaches to Rating Captive Finance Companies and Business Development Companies, and includes a separate Risk Profile methodology grid for Rental Car Companies.

All comments received during the Request for Comment period have been published to the DBRS website, except in cases where confidentiality was requested by the respondent. DBRS received no comments to the Methodology during the Request for Comment Period, which ended on November 12, 2017.

DBRS criteria and methodologies are publicly available on its website www.dbrs.com under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.