DBRS Morningstar Publishes Final Rating CLOs Backed by Loans to European SMEs Methodology

DBRS Morningstar finalised its “Rating CLOs Backed by Loans to European SMEs” methodology (Methodology), which supersedes the version published on 28 June 2021.

The Methodology presents the criteria for which SME CLO ratings and, where relevant, covered bonds and asset-backed (ABS) securities of SME leasing exposures, are assigned.

DBRS Morningstar updated its SME Diversity Model used in the Methodology. The SME Diversity Model produces stressed default rate assumptions used in a cash flow tool that tests the ability of specific tranches or notes to withstand each rating-level stress assumptions. A Monte Carlo simulation of the default of each loan is performed in each trial, with the result stored in a loss distribution. The changes include an update of the Python (programming language) core model code as well as changes to the model deployment infrastructure. These changes also allow for an increased number of simulation trials, improving the convergence of the distribution of defaults for each portfolio tested.

DBRS Morningstar currently rates 56 classes of notes across 36 SME CLOs transactions, 43 classes of notes across 21 ABS transactions, and 261 classes of notes across 12 Covered Bonds transactions for which the SME Diversity Model is used. The updates to the model are deemed to be material but are not expected to impact any outstanding ratings.

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

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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].