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Moody's publishes rating methodology on approach to rating SME balance sheet securitisations

February 3, 2014

Moody's Investors Service has today published a Rating Methodology that describes the rating agency's approach to assigning ratings to securitisation transactions backed predominantly by loans to microenterprises, small- and medium-sized enterprises (SMEs), self-employed individuals and larger corporates as originated in the course of the originator's usual business activities. It consolidates a number of outstanding methodologies, which are listed in the report and which the agency will now retire. Publication of the consolidated methodology will not result in any changes to outstanding ratings of SME-backed ABS. The report, "Moody's Global Approach to Rating SME Balance Sheet Securitizations," is now available on . Moody's subscribers can access this report via the link provided at the end of this press release. Under the Moody's approach, the rating analysis of SME-backed securitisations includes both quantitative and qualitative elements. The main drivers of the quantitative analysis are Moody's projections of future losses on the underlying assets, which depends on the asset default rate and the recovery rate on assets that default. The overall credit quality of a portfolio of SME loan receivables is typically driven by 1) the type of contracts securitized (e.g., loans versus short-term facilities, tenure, repayment profile, etc.), 2) the credit risk related to the obligors, 3) the portfolio composition in terms of obligor, regional and industry concentrations, as well as 4) the type and amount of collateral (e.g., real estate properties) securing the loan receivables. Furthermore, the originator's specific underwriting and servicing policies, along with the current and forecast macroeconomic environment, may affect the credit profile of the pools. Using a quantitative model of the transaction's structure, Moody's calculates the cash flows that investors would receive in the different scenarios, and weights any shortfalls in investor cash flows (i.e., investor losses) by the probability of occurrence (from the calculated probability distribution). That is, Moody's bases its rating on the "expected" (i.e., probability-weighted) loss to investors. For the final rating, Moody's combines the quantitative analyses with its assessments of numerous qualitative factors, including the macroeconomic environment; the operational and counterparty risks to the transaction; any special characteristics of the assets; idiosyncratic structural features of the transaction; and the transaction's legal risks. Consequently, the final rating can differ from the one that Moody's modelling results alone would indicate. This report consolidates and replaces the following methodologies: Â Moody's Approach to Rating EMEA SME Balance Sheet Securitisations, May 2013 Â Moody's Approach to Rating Japan's SME CDOs, February 2009 Â Moody's Approach to Rating Transactions Backed by Real Estate Collateralized SME Loans in Japan , July 2008 Â Moody's Approach to Rating SBA Loan-Backed Securitizations, April 1996 Moody's is implementing the new rating methodology globally as of now, except for jurisdictions in which the rating agency must fulfill regulatory requirements prior to implementation.

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Source: EMBIN (Emerging Markets Business Information News)

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