DBRS Morningstar Requests Comments on Proposed Changes to Its Legal Criteria for European Structured Finance Transactions

DBRS Morningstar is requesting comments on the proposed updates to its “Legal Criteria for European Structured Finance Transactions” (the Methodology), which may supersede the version published on 11 September 2019. This methodology presents the legal criteria according to which European Structured Finance transaction ratings are assigned and/or monitored.

DBRS Morningstar is proposing the inclusion of 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, and the combination of the bank’s rating and a downgrade trigger results in a default risk of the bank commensurate with the rating of 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 proposed new version of the Methodology also more clearly identifies collection account bank risk as a distinct risk from commingling and/or issuer account bank risk. It establishes typical expectations for liquidity to cover payment disruption risk in a manner consistent with higher ratings. It also provides practical examples of when DBRS Morningstar is likely to consider commingling and/or collection account bank risk mitigated to a level commensurate with a AAA (sf) rating.

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

DBRS Morningstar currently rates 2,120 classes of notes across 517 European Structured Finance transactions. The proposed inclusion of the matrix is estimated to have a generally positive (between minus one and plus three notches) rating impact on up to 61 classes of notes. The proposed changes relating to collection account bank and commingling risk are expected to have a generally negative (mostly minus one notch, up to two) rating impact on up to 35 classes of notes.

Comments should be received on or before 19 October 2020. Please submit your comments to the following email address: sfcomments@dbrsmorningstar.com. DBRS Morningstar publishes on its website all comments received, 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 and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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.

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