Introduction to Securitization

RATING OF ABCP CONDUITS

As opposed to ABS where the rating is done based on a particular pool, for ABCP a rating is given for the program. For obvious reasons, the quality of the management of the conduit and the fungible program-wide enhancement are relevant factors in rating the program. The distinction between traditional ABS rating and program rating is that the conduit rating is similar to the rating of corporates.

The significant aspects of rating of the conduit are considered by rating agencies are:

• Quality of management

• Credit quality of assets

• Receivables eligibility criteria

 

We describe each next.

Quality of Management

Unlike ABS where the inanimate pool of assets drives the ratings, the rating of ABCP conduits stress more the entity, that is, the quality of the management of the conduit. The administrator is the management of the program. Adding assets to the book of a conduit is similar to underwriting a credit asset in a bank, so the credit asset policy of the conduit becomes extremely significant here. It is necessary to ensure that the conduit is not being saddled with assets rejected by the regular credit assessment of the bank. As Standard & Poor’s (2005c, p. 8) states:

 

In reviewing a conduit’s underwriting criteria, assurances will be sought that the conduit’s credit and investment policy is at least as conservative as that of the program administrator where the administrator is a financial institution.

 

Sound transaction underwriting would ...