DBRS Morningstar Updates on European SME CLO Diversity Model

DBRS Ratings Limited and DBRS Ratings GmbH (DBRS Morningstar) identified an implementation inconsistency in its SME Diversity Model version 2.4.2.0 (Model) that is described in its “Rating CLOs Backed by Loans to European SMEs” methodology last published in September 2020. The Model is used to assign ratings in European Structured Credit, European ABS, and European Covered Bonds.

The aim of the SME Diversity Model is to produce stressed default rates for use in a cash flow tool that tests the ability of specific tranches or notes to withstand each rating level stress assumption. The inconsistency relates to the Model’s results being dependent on how the analysed portfolio is sorted, which can cause unexpected variation in the stressed lifetime default rates for a given pool of credits. DBRS Morningstar expects that the ratings of up to 10 European SME CLO and European ABS transactions could be affected. The rating impact is expected to be up to two notches and could be positive or negative. No European Covered Bond ratings are expected to be affected.

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 the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

ESG CONSIDERATIONS
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.

Notes:
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 info@dbrsmorningstar.com.