- Ratings Services
- Structured Finance Ratings
Asset Backed Securities are securities backed by a pool of tangible and intangible underlying assets, such as real estate, trade receivables, marketable securities, mortgages, and other property rights. The credit risk of a structured finance security depends on cash flows generated from, and value of, the underlying assets, credit enhancement level, and participants’ ability to fulfill their obligations under the contract.
| Asset-Backed Securitization Act |
Article 2 of the Asset-Backed Securitization Act - a) A series of activities involving issuance of asset-backed securities by a special purpose company (including foreign corporations specializing in the business of asset-backed securitization) using securitization assets transferred to the special purpose company by the originator as the underlying assets, and payment by the special purpose company of amounts of principal and interest or dividends with respect to the asset-backed securities out of the earnings or loans, etc. accruing from the management, operation, or disposition of the securitization assets. |
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| General Definition | Securitization is the conversion of illiquid assets held by financial institutions or companies into marketable securities for the purpose of raising cash. |
Securitization Exposure Ratings assess the credit quality of credit enhancement measures or liquidity facilities provided by third parties to mitigate such risks as credit risk, liquidity risk, and others in structured finance transactions.
Asset securitization is a financial transaction designed to enhance liquidity of assets that have high values but relatively low liquidity by issuing securities with the illiquid assets as collaterals.
Financial institutions and companies use asset securitization to obtain liquidity by utilizing their assets. Asset securitization provides such entities with broader access to financing, lower financing cost, and opportunities for restructuring and improving financial profile.
A special purpose company (SPC) is created to securitize a portfolio of assets transferred from an asset originator. The SPC issues structured finance securities backed by such underlying assets, while securitization is entrusted to a trustee and servicer.
The primary mechanism for repayment of ABS is the cash flows generated from the underlying assets. Credit enhancements may be provided to enhance the repayment capacity on such securities.
Structure finance securities are classified into ABS, Mortgage Backed Securities (MBS), Collateralized Debt Obligations (CDO), etc. depending on the type of underlying assets. They are classified into ABS, Asset Backed Commercial Paper (ABCP), subscription certificate, and beneficiary certificate, depending on the type of securities issued.
- Mortgage-Backed Securities (MBS): RMBS, CMBS
- Consumer ABS: Credit card receivables, Consumer loans, Auto-loans, Auto-lease
- Corporate ABS: Corporate trade receivables, Lease receivables, Rental receivables
- Non-Performing Loan ABS: Non-performing loans
- CDO (Collateralized Debt Obligations): CBO, CLO, CDO Squared
- Pre-Issuance Ratings : Pre-Issuance Ratings are conducted before the security issuance to evaluate the likelihood of timely repayment of principal and interest on the structure finance security.
- Surveillance : Annual Ratings, Reviews on Credit Event
- Annual Ratings : Annual Ratings are conducted once a year to incorporate changes in the probability of timely repayment after the issuance of structure finance security.
- Reviews on Credit Event : Reviews on Credit Event are conducted when an event that has a material impact on the structured finance securities’ credit risk has occurred or is likely to occur after the issuance of structured finance obligations.
Structure finance rating use the same rating scale as corporate bond rating or CP rating depending on the type of security issued. Use of same rating scales as corporate bond rating or CP rating facilitates investors’ understanding of credit risk associated with structure finance securities.
ABS Rating Scale and Definitions
| AAA | An ‘AAA’ rating indicates the strongest capacity for timely repayment. |
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| AA | An ‘AA’ rating indicates very strong capacity for timely repayment. This capacity may, nevertheless, be slightly inferior than is the case for the highest rating category. |
| A | An ‘A’ rating indicates strong capacity for timely repayment. This capacity may, nevertheless, be more vulnerable to adverse changes in circumstances or in economic conditions than is the case for higher rating categories. |
| BBB | A ‘BBB’ rating indicates that capacity for timely repayment is adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. |
| BB | A ‘BB’ rating indicates that the capacity for timely repayment is currently adequate, but that there are some speculative characteristics that make the repayment uncertain over time. |
| B | A ‘B’ rating indicates lack of adequate capacity for repayment and speculative characteristics. Interest payment in time of unfavorable economic conditions is uncertain. |
| CCC | A ‘CCC’ rating indicates lack of capacity for even current repayment and high risk of default. |
| CC | A ‘CC’ rating indicates greater uncertainties than higher ratings. |
| C | A ‘C’ rating indicates high credit risk and lack of capacity for timely repayment. |
| D | A ‘D’ rating indicates insolvency. |
※ ‘+’ or ‘-’ modifier can be attached to ratings through AA to B to differentiate ratings within broader rating categories.
ABCP Rating Scale and Definitions
| A1 | An ‘A1’ rating indicates the strongest capacity for timely repayment, and this capacity is highly stable. |
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| A2 | An ‘A2’ rating indicates strong capacity for timely repayment. This capacity, nevertheless, is slightly inferior than is the case for the highest rating category. |
| A3 | An ‘A3’ rating indicates satisfactory capacity for timely repayment and stability of that capacity. The stability, nevertheless, is slightly inferior than is the case for higher rating categories. |
| B | A ‘B’ rating indicates adequate capacity for timely repayment. This capacity, however, lacks stability and is susceptible to short-term changes in economic conditions. |
| C | A ‘C’ rating indicates clear speculative characteristics. |
| D | A ‘D’ rating indicates insolvency. |
※ ‘+’ or ‘-’ modifier can be attached to ratings through A2 to B to differentiate ratings within broader rating categories.
Korea Investors Service introduced Watchlist system on November 1, 1998, which was the first among Korean credit rating agencies. Watchlist is used to indicate that a rating is placed under review for possible change to incorporate changes in factors that affect the issuer’s credit quality.
Global rating agencies, including Moody’s Investors Service, have used the Watchlist as an important part of their ratings processs to meet investors’ needs for timely rating updates.
A rating may be put on KIS Watchlist for possible upgrade, downgrade, or occasionally with direction uncertain along with the rationale behind such Watchlist placements in order to provide investors with an indication of the likely direction.
- Possible Upgrade : When there are factors that warrant potential rating upgrade
- Possible Downgrade : When there factors that warrant potential rating downgrade
- Direction Uncertain : When there are factors that warrant potential rating change but the direction is unclear
Structured Finance Ratings are valid through the maturity of the rated securities.
Structured Finance Ratings and the rating opinions are attached to the securities registration form prepared by the issuer of such securities. They are disclosed through various channels including KIS webpage, KOSCOM, Korea Stock Exchange, Korea Financial Investment Association (KOFIA), Bloomberg, Reuters, Yonhap News, major institutional investors and media.
