A structured finance security is a security backed by a pool of assets (underlying assets) such as real estate, trade receivables, marketable securities, mortgages, or other tangible/intangible assets. Credit risk of a structured finance security depends on cash flows generated by the underlying assets, value of the underlying assets, credit enhancement level, and the deal participants’ ability to fulfill their obligations under the contract.
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.
An SPC(Special Purpose Company) is a company established for the specific purpose of acquiring originator’s assets and securitizing the assets. SPC issues structure finance security, and Servicer and Trustee handles overall matters associated with the deal.
Repayment of the principal and interest on the structure finance security is covered with cash flows from management and disposition of the underlying assets. And diverse credit enhancement mechanisms are utilized to mitigate credit risks.
Structure finance securities are classified into ABS, MBS(Mortgage Backed Securities), CDO(Collateralized Debt Obligations), etc. depending on the type of underlying assets. And depending on the type of securities issued, asset backed securities are classified into ABS, ABCP(Asset Backed Commercial Paper), subscription certificate, and beneficiary certificate.
ABS rating is classified into “Pre-sale Rating” and “Surveillance”.
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.
Structured finance ratings are valid through the maturity of the rated securities.
Structured finance ratings and the rating opinions are attached on the securities registration forms. And the ratings are released through official disclosure channels including KOSCOM, Korea Stock Exchange, Korea Securities Dealers’ Association, Bloomberg, Reuters, Yonhap News, and major media and institutional investors.
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 a possible rating change to incorporate changes in factors that affect the issuer’s credit quality.
Many credit rating agencies in the world including Moody’s Investors Service use a watch list as an important part of their credit rating process to meet the need of the market for timely rating updates. When a rating is placed on Watchlist, the direction of expected change (‘Possible Upgrade’, ‘Possible Downgrade’, and ‘Direction Uncertain’) is also posted.
