DBRS Morningstar Publishes Final Legal Criteria for European Structured Finance Transactions

DBRS Morningstar finalised its “Legal Criteria for European Structured Finance Transactions” methodology (the Methodology).

The Methodology presents the legal criteria for which European Structured Finance transaction ratings are assigned and/or monitored.

The Methodology supersedes the prior version published on 11 September 2019 and is effective as of 6 April 2021.

DBRS Morningstar included a matrix in the Methodology showing how DBRS Morningstar assesses the risk of loss due to an account bank’s failure, despite the presence of a replacement trigger. The matrix expresses such risk of loss levels in ratings for different combinations of account bank rating triggers and current account bank ratings. Where exposure to the account bank in the transaction is limited, other sources are expected to be available to the issuer to meet its imminent obligations. The combination of the account bank’s rating and a downgrade trigger results in a default risk for the bank that is commensurate with the rating on the highest-rated liabilities of the issuer. The incremental risk arising from the account bank is generally negligible and does not constrain ratings on the issuer’s liabilities.

The Methodology also more clearly distinguishes collection account bank risk from commingling and/or issuer account bank risk and establishes typical expectations for liquidity to cover payment disruption risk in a manner consistent with higher ratings. The Methodology also provides practical examples of when DBRS Morningstar is likely to consider commingling and/or collection account bank risk mitigated to a level that is commensurate with a AAA (sf) rating.

Other amendments to the Methodology reflect evolving practices in the European Structured Finance market.

As a result of the application of the above Methodology, DBRS Morningstar has taken rating actions on 50 European Structured Finance transactions. For more information on the affected transactions, please refer to “DBRS Morningstar Takes Rating Actions on 50 European Structured Finance Transactions Following Finalisation of European Legal Criteria” at https://www.dbrsmorningstar.com/research/376313.

No comments were received during the request for comment (RFC) period for the Methodology.

All comments received during the RFC period have been published to the DBRS Morningstar website, except in cases where confidentiality is requested by the respondent.

Notes:
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

DBRS Morningstar methodologies are publicly available on its website www.dbrsmorningstar.com under Methodologies & Criteria.

For more information on this methodology or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].