care's securitization rating methodology jul 2011
DESCRIPTION
care ratingTRANSCRIPT
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Professional Risk Opinion
Rating Methodology Rating Methodology forfor
ABS / MBS ABS / MBS TransactionsTransactions
About CARE
CARE’s Experience
CARE’s Securitization Rating Process
Why CARE
Agenda
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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.
CARE’s 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
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Clientele - Financial Services
General Insurance Corporation of India
SIDBI
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About CARE
CARE’s Experience
CARE’s Securitization Rating Process
Why CARE
Agenda
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Our Experience – ABS and MBS
Seller Asset Class Amount (Rs
Cr) No of Pools
Shriram Transport Finance Co. Ltd. CV 8,587 20
ICICI Bank Ltd.Cars, CV, TW,
PL 4,850 1
HDFC Ltd HL 4,764 7Srei Equipment Finance Pvt. Ltd. CE 1,742 14
Magma Fincorp Ltd. CV, CE & Cars 1,687 18
SKS Microfinance Ltd. Microfinance 1,033 8
HDFC Bank Ltd. CV & Cars 560 1Bandhan Financial Services Pvt Ltd. Microfinance 350 2
Hinduja Leyland Finance Ltd CV 224 2
Others 292 8
Total 24089 81
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ABS / MBS rating by CARE in FY11
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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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
List of Originator
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About CARE
CARE’s Experience
CARE’s Securitization Rating Process
Why CARE
Agenda
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Rating Methodology
Assess the Underlying Asset
Impose the Transaction Structure
Assign Rating
Timeline & Information Required
Surveillance
CARE’s Securitization Rating Process
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Key Risk Credit Risk Market Risk Counterparty Risk Legal Risk
CARE’s Securitization Rating
Process
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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 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 originator’s assets
Portfolio Analysis
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Credit Risk
Originator Analysis Formation of Static Pool
Calculation of Delinquencies on Monthly Basis
Analyzing Vintage curves - mean, volatility & pattern
Identification of loss drivers
Analysis of past rated pools
Portfolio Analysis
Static Pool Analysis
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Credit Risk
Originator Analysis Pool Selection Criteria
Pool characteristics
Concentration of the Pool – based
on geography and obligor.
Portfolio Analysis
Static Pool Analysis
Collateral Analysis
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Credit Risk
Originator 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
Portfolio Analysis
Static Pool Analysis
Collateral Analysis
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
States Portfolio % 90+ dpd Pool %Maharshtra 20% 1.80% 20%
Delhi 15% 2.50% 25%
Tamil Nadu 15% 1.50% 20%
Andhra Pradesh 20% 1.30% 10%
Karnataka 25% 1.30% 10%
Others 5% 3.00% 15%
Total 100% 1.70% 100%2.00%
18%
Better performing states
Worse performing states
Pool weighted average 90+ dpd
Extent of negative deviation
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Market risk
Macro-economic scenario
Asset risk
Prepayment risk
Interest rate risk
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Market Risk
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
Macro Economic Scenario
Asset Risk
General risk perception of the asset
Introduction of newer models/substitutes
New technology
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Market 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
Prepayment Risk
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
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
Servicer Risk
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
transactionDeed 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.28
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
Cash flow stress
Base Case Scenario – 50% Probability below this point
Stress Case Scenario – 99.9% Probability below this point
Cumulative Losses
Probability of Loss(%)
Base Case (median)
Stress Case
X Y
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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Pool Size
AAA
BBB 15%
6%
First Loss CE to make transaction
Investment Grade
Second Loss CE – Additional CE above BBB to
desired rating level
Liquidity Facility is determined based on delinquency
First Loss & Second Loss Credit Enhancement
Assign Rating
CARE’s Securitization Rating Process
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Rating Methodology
Assess the Underlying Asset
Impose the Transaction Structure
Assign Rating
Timeline & Information Required
Surveillance
CARE’s Securitization Rating Process
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Start of First transaction with Originator
Cash Flow Modeling- Credit Enhancement
Rating Letter – after Rating Committee Meeting
Static Pool AnalysisPortfolio AnalysisCollateral AnalysisServicer Capabilities
Initial Collateral Analysis
Transaction Structure Review – Financial & Legal
Surveillance
CARE’s Securitization Rating Process
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INFORMATION REQUIRED
For each asset class separately
Historical static pool data (Loan-wise)
Loan Characteristics at the time of disbursements, loan details, monthly billing & collection, foreclosure, prepayments, recovery, repo loss
Originator’s Portfolio Data Monthly Dpd movementsNPA – gross and netPortfolio cuts with 90+dpd and 180+ dpdCollection data – current and overdues
Qualitative Information(Meeting with the Management)
SourcingLoan origination & appraisalMIS and disaster recovery systems Collection mechanism
Past securitization transactions
Performance Data
Actual Pool Data (contract wise with characteristics)Proposed Transaction Structure in the form of draft term sheet
CARE’s Securitization Rating Process
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Rating Methodology
Assess the Underlying Asset
Impose the Transaction Structure
Assign Rating
Timeline & Information Required
Surveillance
CARE’s Securitization Rating Process
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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
Surveillance
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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.
Surveillance
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About CARE
CARE’s Experience
CARE’s Securitization Rating Process
Why CARE
Agenda
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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
Why CARE?
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Thank You
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