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Professional Risk Opinion

Rating Methodology for

ABS / MBS Transactions

Agenda

About CARE

CAREs Experience

CAREs Securitization Rating Process

Why CARE

About CARE RATINGS

One of the Premier Rating Agencies, Incorporated in

1993 by leading Banks & Investment Institutions.

Largest Shareholders - IDBI Bank, Canara Bank & SBI.

Registered with SEBI, ECAI Recognition by RBI.

CAREs Ratings are recognised by GoI & all regulators

Completed 7,636 rating assignments having aggregate

value of about Rs. 23,000 billion (as at March 31, 2010).
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About CARE RATINGS

Largest Rating coverage of Indian Banks & FIs

Leadership in Sovereign Ratings

Over a decade of experience

Full Service Rating Agency

Wide Sectoral coverage

ACRAA member
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Clientele Banks

Andhra Bank

Clientele - Financial Services

General Insurance Corporation of India

SIDBI

Agenda

About CARE

CAREs Experience

CAREs Securitization Rating Process

Why CARE

Our Experience ABS and MBS

Seller
Shriram Transport Finance Co. Ltd.

Asset Class

Amount (Rs Cr) No of Pools

CV

8,587

20

Cars, CV, TW, PL

4,850

HDFC Ltd

HL

4,764

Srei Equipment Finance Pvt. Ltd.

CE

1,742

14

Magma Fincorp Ltd.

CV, CE & Cars

1,687

18

SKS Microfinance Ltd.

Microfinance

1,033

CV & Cars

560

Microfinance

350

CV

224

292

24089

81

ICICI Bank Ltd.

HDFC Bank Ltd.

Bandhan Financial Services Pvt Ltd.
Hinduja Leyland Finance Ltd
Others

Total

ABS / MBS rating by CARE in FY11

Market leader with over 30% market share in last 2 years.
Rated 29 transactions amounting to Rs. 7,615 Cr in FY11
Rated 35 transactions amounting to Rs. 8,760 Cr in FY10
Key investors in CRAE rated deals
HDFC Bank Ltd.

Punjab & Sind

Bank

State Bank of
Patiala

ICICI Bank Ltd.

Syndicate Bank
Ltd.

ING Vysya Bank

Ltd.

IDBI Bank Ltd.

Yes Bank Ltd.

HDFC Mutual
Fund

Reliance Mutual
Fund

Tata Capital Ltd. Bank of Borada

Oriental Bank of
Commerce

IDFC Ltd.

SBICI

Bank of
Maharashtra

United Bank of
India

Bank of Bharain

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List of Originator

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Agenda

About CARE

CAREs Experience

CAREs Securitization Rating Process

Why CARE

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CAREs Securitization Rating Process

Rating Methodology
Assess the Underlying Asset
Impose the Transaction Structure
Assign Rating

Timeline & Information Required

Surveillance

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CAREs Securitization Rating Process

Key Risk

Credit Risk
Market Risk
Counterparty Risk
Legal Risk

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Credit Risk
Originator Analysis

Quality of Management
Management
Credit appraisal systems
Monitoring
Collection mechanism
Typically a better originator will have
to provide lesser credit enhancement
for a particular asset class

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Credit Risk
Originator Analysis
Portfolio Analysis

Quality of Portfolio
Collection Efficiency
Gross & Net NPA
Aging Analysis
Movements in bucket
Dynamic Portfolio analysis gives useful
indications about the overall credit
quality of the originators assets

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Credit Risk
Originator Analysis

Formation of Static Pool

Portfolio Analysis

Calculation
of
Monthly Basis

Static Pool Analysis

Analyzing Vintage
volatility & pattern

Delinquencies

curves

on

mean,

Identification of loss drivers

Analysis of past rated pools

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Credit Risk
Originator Analysis

Pool Selection Criteria

Portfolio Analysis

Pool characteristics

Static Pool Analysis

Concentration of the Pool based on

geography and obligor.

Collateral Analysis

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Credit Risk
Originator Analysis
Portfolio Analysis
Static Pool Analysis

Collateral Analysis

Pool and portfolio cuts on various

parameters like geography, LTV, IRR,
borrowers profile etc.
The benchmarking based on 90+dpd /
180+dpd
Stress factor based on extent of deviation

Pool Comparison

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Credit risk

Pool and portfolio comparison analysis

Pool and portfolio cuts on various parameters like geography, LTV,

IRR, borrowers profile etc.

The benchmarking based on 90+dpd/180+dpd
Stress factor based on extent of deviation

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Market risk

Macro-economic scenario

Asset risk

Prepayment risk

Interest rate risk

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Market Risk
Macro Economic Scenario
Affects underlying asset valuation, depreciation, income generating capacity
of the asset (CE, CV), borrowers income, market interest rates, etc

Expected economic scenario has an impact on future behavior of the pool.

Regulatory scenario is also a critical aspect to consider for different asset
classes

Asset Risk
General risk perception of the asset
Introduction of newer models/substitutes
New technology

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Market Risk
Prepayment Risk
Premium structure - prepayments lead to premium loss
Par structure - prepayments can lead to reduced EIS due to higher interest
rate contract getting prepaid

CARE factors in the stressed prepayment rates and sizes the enhancement
accordingly

Interest Rate Risk

Floating and fixed interest rate mismatch
Basis risk typically not an issue in ABS
CARE will stress the pool based on various interest rate scenario and size the
enhancement accordingly

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Counterparty risk

Servicer risk
Commingling risk
Other counterparty risk

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Counterparty Risk
Servicer Risk
Ability of the servicer to service the pool over the tenure of the transaction
Credit quality of the servicer
Length of the transaction restricted based on the same
Back-up servicer needed for lower rated service provider

Commingling Risk
In the event of bankruptcy of the servicer - risk of commingling of the cash
flows of the servicer with the pool collections

Short term credit rating of the servicer

In case of low credit rating the risk is sized in the enhancement

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Counterparty risk

Other counterparty risks

Collection account bank

Credit collateral account bank

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Legal risk

Key legal requirements

True sale
Bankruptcy remoteness
CARE requires a legal opinion from an expert independent
legal counsel to address the legal risk

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Legal risk
Typical documents executed in an assignment transaction

Deed of Assignment - To evidence the transfer of receivables by the Originator

to the Assignee. It will also include clauses for the following:
Collection Agent - To appoint & define the role, duties & responsibilities
of Collection Agent / Servicer.
First Loss Facility - To specify the terms and conditions of its availability,
utilization & replenishment of First Loss Facility.
Second Loss Facility - To specify the terms and conditions of its
availability, utilization & replenishment of Second Loss Facility.
Power of Attorney To give the power and rights to assignee or its
representative to perform various acts and deeds in relation to securitized
contracts including enforcement of security.
Such other documents as required.

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Cash flow stress

CARE applies a lognormal distribution approach to assess the level of stress required to
achieve a particular rating based on the static pool losses

Various research papers have established that credit losses follow a lognormal
distribution

Stress derived based on the default rates for the target rating
Probability
of Loss(%)

Base Case Scenario 50%

Probability below this
point
Stress Case Scenario 99.9%
Probability below this point

Base Case
(median)

Stress Case

Cumulative Losses
Other stress factors

Extent of deviation based on the pool v/s portfolio comparison

Pool characteristics (high IRR, high LTV etc.)

Lack of adequate information

Volatility of portfolio performance

Any other factor based on the risk analysis

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CAREs Securitization Rating Process

Assign Rating

First Loss & Second Loss Credit Enhancement

Second Loss CE
Additional CE above
BBB to desired rating
level

Pool
Size
AAA

15%

BBB

First Loss CE to make

transaction
Investment Grade

6%

Liquidity Facility is determined based on delinquency

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CAREs Securitization Rating Process

Rating Methodology
Assess the Underlying Asset
Impose the Transaction Structure
Assign Rating

Timeline & Information Required

Surveillance

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CAREs Securitization Rating Process

Start of First transaction with
Originator

Initial Collateral
Analysis

Transaction
Structure Review
Financial & Legal

Static Pool Analysis

Portfolio Analysis
Collateral Analysis
Servicer Capabilities

Cash Flow Modeling

- Credit Enhancement

Rating Letter after Rating

Committee Meeting

Surveillance
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CAREs Securitization Rating Process

INFORMATION REQUIRED
For each asset class separately
Historical static pool data (Loanwise)

Loan Characteristics at the time of

disbursements, loan details, monthly
billing & collection, foreclosure,
prepayments, recovery, repo loss

Originators Portfolio Data

Monthly Dpd movements

NPA gross and net
Portfolio cuts with 90+dpd and 180+ dpd
Collection data current and overdues
Sourcing
Loan origination & appraisal
MIS and disaster recovery systems
Collection mechanism
Performance Data

Qualitative Information
(Meeting with the Management)

Past securitization transactions

Actual Pool Data (contract wise with characteristics)

Proposed Transaction Structure in the form of draft term sheet

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CAREs Securitization Rating Process

Rating Methodology
Assess the Underlying Asset
Impose the Transaction Structure
Assign Rating

Timeline & Information Required

Surveillance

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Surveillance

Monthly surveillance data to be provided to CARE

CARE will monitor the pool performance monthly

Actual Performance of the pool is compared with expected behaviour

Sufficiency of Credit Enhancement is examined

Suitable rating actions taken when warranted

Pool Performance Update for all outstanding pools are published
quarterly
Performance discussed with investors as per their requirements

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Surveillance

Pool Performance Indicators

Collection Efficiency ratios

Ageing Analysis Default & Delinquency rates

Actual Prepayment rates

Credit Enhancement Utilisation rates

Enhancement coverage levels at 90+dpd and 180+dpd

Credit quality of Originator.

Performance of Overall Portfolio (asset-class wise) of the Originator.

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Agenda

About CARE

CAREs Experience

CAREs Securitization Rating Process

Why CARE

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Why CARE?

Scientific approach based on the lognormal distribution

Transparent Approach

Methodology, Assumptions & even the Workings explained in

detail

Investor Friendly Approach

Direct dialog with the investor at the time of rating as well as

surveillances

Proactive Feedback to originator & investors on performance of the

pool

Stress on Fundamental business analysis along with the models

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Thank
You

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