DBRS Re-Publishes Its Expected Loss Rating Scale

DBRS re-published its Expected Loss Rating Scale (the EL Rating Scale), which is a scale DBRS can apply to untranched debt or equity securities (Pass-Through Instruments) whose performance depends predominantly on the credit performance of a loan portfolio backing such instruments. For the avoidance of doubt, the EL Rating Scale is not used for rating securitization transactions or covered bond debt obligations.

The EL Rating Scale is used by DBRS globally and gives an indication of the expected loss of a Pass-Through Instrument. The expected loss is the reduction of the Pass-Through Instrument’s present value as a result of expected adverse credit performance in terms of amounts due on the loans in the portfolio backing the Pass-Through Instrument not being paid and/or the delayed payment of amounts due on the loans. An Expected Loss Rating does not address the timeliness of expected interest and principal payments. In addition, the Expected Loss Rating does not address market volatility of the loan portfolio, liquidity, foreign exchange, leverage, regulatory risks or other erosion of the market value.

To derive the Expected Loss Rating for a Pass-Through Instrument whose performance depends predominantly on the credit performance of a loan portfolio backing such instrument, DBRS compares the present value of the portfolio in a no-loss scenario with the present value of the portfolio in DBRS’s expected portfolio loss scenario. The difference of both present values is the Pass-Through Instrument’s expected loss, which, together with the average life, is mapped into an expected loss rating.

DBRS’s expected portfolio loss scenario is derived using the applicable rating methodology (for example, the European RMBS methodology for residential mortgages). The discount rate used to determine the present value in both scenarios is the weighted-average interest rate of the loan portfolio over time. The average life of the portfolio is derived using the no-loss scenario and considers the expected portfolio repayment and prepayment rates in such a scenario.

For more information on the EL Rating Scale, visit www.dbrs.com or contact us at info@dbrs.com.