Credit Securitisations and Derivatives: Challenges for the Global Markets

10

Global Structured Finance Rating

Henrik Jönsson1, Francesca Di Girolamo1, 2, Wim Schoutens2 and Francesca Campolongo1

1European Commission

2K.U. Leuven

10.1 INTRODUCTION

Asset-backed securities (ABSs) are securities created through a securitization process whose value and income payments are backed by a specific pool of underlying assets. Illiquid assets that cannot be sold individually are pooled together by the originator (Issuer) and transferred to a shell entity specially created to be bankruptcy remote, (a so-called Special Purpose Vehicle (SPV)). The SPV issues notes (liabilities) to investors with distinct risk return profiles and different maturities: senior, mezzanine and junior notes. This technique is called tranching of the liability. Cash flows generated by the underlying assets are used to service the notes; the risk of the underlying assets as a result are diversified because each security now represents a fraction of the total pool value.

A securitization credit rating is an assessment of the credit risk of a securitization transaction, addressing how well the credit risk of the assets is mitigated by the structure. The rating process is based on both quantitative assessment and a qualitative analysis of how the transaction mitigates losses due to defaults. For the quantitative assessment, different default scenarios combined with other assumptions, for example, pre-payments, are generated using more or less sophisticated models. Typically the input parameters ...