ICRA’s Structured Finance Ratings (SFRs) are ICRA’s opinion on the likelihood of the Rating structured instrument servicing its debt obligations in accordance with the terms. An SFR, which is generally different from the corporate Credit Rating of the originator, is based on the assessment of the risks associated with the individual components
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of the structured instrument. These components include legal risk, credit quality of the underlying asset, and the various features of the structure. The symbols used for SFRs are similar to the Credit Rating symbols, except that the SFRs carry a suffix of SO (for Structured Obligation) within parentheses alongside. SFRs are based on an estimation of the expected loss on the Rated instrument, under various possible scenarios. The expected loss is defined as the product of probability of default and severity of loss, once the default occurs. An SFR symbol indicates the relative level of expected loss for that instrument, with the risk of loss being similar as in the case of a corporate Credit Rating of the same level. An SFR is different from the Credit Rating of the originator as it is based on the strength of the underlying assets and structure. ICRA’s major SFR products (corresponding to the major categories of the underlying assets) are listed here. ICRA employs a specific methodology for each of its SFR products. The methodology is based on ICRA’s understanding of that particular asset class and the structure and legal issues associated with the transaction involved.
Asset-Backed Securitisation (ABS)
ABS refers to the securitisation of a diversified pool of assets, which may include financial assets like automobile loans, commercial vehicle loans, or consumer durable loans, or any non-financial class of assets that are identifiable and separable from the operations of the issuer, and whose risk of loss is measurable.
Mortgage Backed Securitisation (MBS)
An MBS has diversified housing loans as the underlying asset for the transaction.
Collateralised Debt Obligation (CDO)
A CDO transaction has a pool of corporate loans, bonds or any other debt security, including structured debt, as the underlying asset.
Future Flow Transaction (FFT)
FFTs involve a structure where specific sources of future cash flows are identified and earmarked for servicing investors. Some examples of such sources are property tax revenues of municipal corporations, power receivables of bulk consumers, and property lease rentals. FFTs are not completely de-linked from the credit risk of the issuer, but the structure, through preferential tapping of the cash flows of the issuer, can achieve a Rating that is higher than the issuer’s Credit Rating.
Partial Guarantee Structures (PGS)
These are on balance sheet liabilities that are credit enhanced through an external guarantee.
The Benefits
An issuer may derive multiple advantages from structured finance products like lower cost of funds, access to new markets and investors on the strength of a higher Rating vis-à-vis a stand-alone corporate Credit Rating, improved capital adequacy, reduced asset-liability mismatches, and greater specialisation.
