DBRS analysts work within specific industries and product groups in the Corporate and Structured Finance business sectors. Each entity rated by DBRS is normally covered by two analysts, who work together on the rating, attend meetings with the issuer's senior management, and make a recommendation with regards to a rating action for the entity or security. Surveillance analysts are also assigned to monitor outstanding structured finance ratings. .
The following outlines the steps generally taken during the Corporate rating process:
In most cases, DBRS is contacted by the issuer directly or by its investment banker or dealer and requested to conduct a corporate rating.
In order to formalize the rating assignment, DBRS generally requires the issuer to confirm the terms of the engagement.
DBRS gathers relevant information about the issuer from a variety of sources for the purposes of conducting the rating analysis.
DBRS generally conducts an extensive meeting or series of meetings with management regarding all relevant aspects of the issuer's business. In addition to DBRS learning more about the issuer and its financing plans, the areas outlined in DBRS rating methodologies are considered to be the key areas of importance to address when speaking with senior management. If applicable to the business, a facility tour may be included during these meetings.
Following analysis of the information obtained, typically a draft rating report is prepared.
The analysis, draft rating report, if prepared, and proposed rating are submitted to the Rating Committee, who will determine the rating. For further information regarding Rating Committee, please refer to DBRS policy "Rating Committee – Corporate and Structured Finance"
Once Rating Committee approval is received the issuer is generally provided with a copy of the draft rating report, if prepared, and related press release to review to ensure that the factual information is correct and that these materials do not contain any confidential information. In the event that an issuer disagrees with the rating and requests DBRS to reconsider, any re-evaluation of a rating would occur in accordance with the DBRS policy "Rating Appeal".
Except for private ratings, internal assessments and for certain private placement transactions, the final rating report, if prepared, is externally published, accompanied by the press release.
DBRS maintains ongoing surveillance of all its ratings (including public and private ratings and internal assessments). Generally a rating is fully reviewed and a meeting conducted with senior management of the issuer on an annual basis. Unless the rating is based on public information, DBRS expects the co-operation of the issuer in keeping DBRS informed of any significant developments, providing DBRS with continuing financial information as released, and responding to questions that arise.
While there can be minor differences in the rating process across different jurisdictions and product lines, outlined below are general principles and the steps generally taken during the Structured Finance rating process.
As securities are typically issued by a special purpose vehicle (SPV) to fund the purchase of the underlying transactions, to properly assess these structures, the rating process is divided into two stages:
The review of the SPV structure generally includes the following steps:
(1) Initial Contact
An initial meeting between DBRS and the sponsor, usually the financial institution which will be structuring transactions for third party clients or selling assets directly into the SPV, will be held to discuss the structure of the SPV.
(2) Letter of Engagement
In order to formalize the rating assignment, DBRS generally requires the sponsor to confirm the terms of the engagement.
(3) Gathering information on the Sponsor
DBRS will review first time sponsors to evaluate their financial and operational capabilities. Subsequent to the receipt of the information from the sponsor, an onsite review may be conducted by DBRS.
(4) Structural and Legal Review
The sponsor will provide DBRS with constituting documents to allow DBRS to ensure that the legal structure is consistent with the described purpose of the SPV.
(5) Draft Rating Report
Structured Finance SPVs are generally either multi-seller, multi-asset conduits which focus on the issuance of Asset Backed Commercial Paper ("ABCP") or single seller conduits which will issue debt instruments with a broader maturity profile, including term notes and focus on the monetization of assets originated by a single entity ("ABS").
For an ABCP conduit, typically a draft rating report will be prepared by the analyst that focuses on the structural features of the conduit, the roles performed by various parties as well as the structural risk mitigants or flexibilities that exist within the ABCP conduit.
For an ABS conduit, a draft rating report is typically more specific as it will deal not only with the structure of the conduit, but will also involve the review and description of the assets, a specific series of note(s) to be issued in support of a purchase and the related enhancement.
These draft rating reports are a synopsis of the presentation of information that will be made to Rating Committee by the analyst.
(6) Rating Committee
The analysis, draft rating report, if prepared, and proposed rating are submitted to the Rating Committee, who will determine the rating. For further information regarding Rating Committee, please refer to DBRS policy "Rating Committee – Corporate and Structured Finance"
(7) Review by the Sponsor
Once Rating Committee approval is received, the sponsor is provided with a copy of the press release and draft rating report, if prepared, to review to ensure that the factual information is correct and that these materials do not contain any confidential information. In the event that a sponsor disagrees with the rating and requests DBRS to reconsider, any re-evaluation of a rating would occur in accordance with the DBRS policy "Rating Appeal".
(8) Publishing
Except for private ratings, internal assessments and for certain private placement transactions, the press release and final rating report, if prepared, is externally published.
(9) Surveillance
Each sponsor of a SPV structure is generally required to provide DBRS with a monthly report, which provides an overview of the performance of each purchase made by the SPV structure and the overall portfolio within the SPV structure, and to provide prompt notification to DBRS of any covenant trigger and a proposed course of action to remedy the situation.
The DBRS Surveillance Group generally reviews the monthly report from the sponsor, provides, as necessary, notice to the analyst covering the rating of a breach of any covenant, and records any such breach and any deteriorating transactions1 on the Watch List2 for further monthly reviews.
Generally, each purchase of assets by either an ABCP or an ABS conduit is reviewed by Rating Committee. For an ABCP purchase, DBRS will typically issue a confirmation letter for the conduit's rating. For an ABS purchase, DBRS will typically publish a rating which will provide a detailed analysis of the assets supporting a specific series of note issued.
The review of specific transactions to be funded through the SPV structure consists of certain standard elements including management contact, specific information requirements and documentation review, review of the seller, determination of credit enhancement and Rating Committee review.
The purpose of this policy is to set out the measures that DBRS has adopted to ensure that the information it uses in assigning a rating is of sufficient quality to support a credible rating. These measures generally include review of asset data, legal documents and client information.
DBRS has expectations regarding the data it should receive from issuers or intermediaries for each asset class it rates. Such expectations would typically include: the time period covered by the data; loan level characteristics; pool stratifications, pool eligibility criteria, payment rate and certain key ratios including delinquency, default and loss. Actual data received is reviewed against expectations in terms of overall completeness and completeness within each data class. Data is also subject to a reasonableness review by a DBRS analyst who will review the data provided against benchmarking data compiled by government agencies, other long tenured debt issuers and any other sources deemed appropriate by DBRS.
DBRS reviews transactional base legal documents for completeness and reasonableness. This includes a review of the suitability of any representations and warranties received from the investment banks or other financially responsible parties relating to the quality of underlying assets.
DBRS conducts know your client checks, as appropriate. These can include: review of the data provider's past practices and transaction performance, seller (originator, sponsor and/or issuer) and servicer site visits, management meetings and discussions, and review of publicly available documentation concerning the seller's financial standing.
In the event that a data, legal document or client review provides results that are unsatisfactory to DBRS, DBRS will decline to issue a rating in respect of the transaction.
The purpose of this policy is to set out how DBRS maintains the integrity of its rating processes by separating its personnel who engage in analytical processes from those involved in fee discussions.
"Analytical Personnel" means DBRS staff who are responsible for participating in determining, approving or monitoring credit ratings or developing or approving procedures or methodologies used for determining credit ratings, including qualitative and quantitative models.
In order to ensure that the determination of DBRS ratings is influenced only by factors relevant to credit assessments and not influenced by broader business considerations, DBRS maintains an organizational and committee structure designed to effectuate the separation of its Analytical Personnel from those who are involved in fee discussions with issuers, or potential issuers who may seek a DBRS rating.
DBRS ratings and rating actions are determined by Corporate and Structured Finance rating committees, and DBRS methodologies and models that are applied in its rating analysis are approved by Corporate and Structured Finance criteria committees, as appropriate. Only Analytical Personnel are eligible voting members on DBRS rating and criteria committees. Non Analytical Personnel who are involved with any aspect of the fee or payment process are not permitted to participate on rating and criteria committees.
All Analytical Personnel are prohibited from initiating, arranging, negotiating or participating in discussions regarding fees or payments for ratings. All aspects of the fee and payment process are required to be conducted by non Analytical Personnel.
All ratings and rating actions for both Corporate and Structured Finance credits rated by DBRS are determined by Rating Committees, whose authority has been delegated by the Executive Group3. DBRS uses Rating Committees to make these determinations primarily for the reasons set out below.
Rating Committees:
(1) provide objective and independent rating decisions that are a reflection of DBRS's opinion, rather than the view of an individual analyst or analysts;
(2) ensure rating decisions are based on sufficient information, incorporate both global and local considerations, and apply DBRS approved methodologies;
(3) provide a checkpoint for actual and perceived conflicts of interest among analysts; and
(4) standardize the rules, procedures and documentation processes to drive efficiency and adherence with respect to rating decisions.
Rating Committees have specific member composition requirements, as outlined in DBRS Rating Committee procedures, which are dependent upon a number of factors, including the nature of the issue or rating action under consideration, the corporate industry sector, and the type of structured finance transaction, for example. All Rating Committees, however, are comprised of experienced and knowledgeable DBRS analysts, senior staff and management personnel.
Rating Committees typically meets on an 'as-needed' basis, as new rating coverage is initiated, as rating actions are requested or rating events occur. This approach provides maximum flexibility, as well as permitting timely and informative rating decisions. Generally, all relevant materials are distributed to participants in advance, these materials are presented and evaluated during the meeting, and following due consideration and discussion a vote is taken on a clear recommendation for the issue under consideration.
Rating Committees observe DBRS procedural requirements in respect of the following matters:
Prior to the publication of a rating action, DBRS provides the issuer or sponsor, as applicable, with a copy of the press release and any report prepared in relation to the rating action.
An issuer/sponsor may request an appeal of a DBRS rating action when:
(1) material new information is provided to DBRS; or
(2) there is a significant change in the terms of the proposed issue.
DBRS considers rating appeals on a case by case basis. DBRS will defer issuing the press release and any related report pending disposition of the appeal request and resolution of the appeal, as applicable.
DBRS issues press releases to inform the public on a variety of issues, including, but not limited to: DBRS public rating opinions4, new and changed rating methodologies, the availability of industry-specific studies and commentaries, and significant regulatory-related events.
DBRS strives to issue all press releases in a timely manner, placing a high priority on informing the public of its rating opinions in respect of the public ratings maintained by DBRS, as soon as possible, following the rendering of the decision by the Rating Committee.
(i) Distribution and Publication of Regulation D Pre-Sale Reports
Pre-sale reports for Regulation D private placements rated by DBRS may be provided directly to the issuer, the investment banker(s) to the transaction, and/or to the qualified investors whose particulars have been provided to DBRS by the issuer or the investment banker(s).
Pre-sale reports for these private placements are not generally published on the DBRS website prior to the closing of the private placement transaction.
(ii) Publication of Regulation D Post-Closing Reports
Post-closing reports for Regulation D offerings and related press releases rated by DBRS are generally published on the DBRS website, subject to the approval of the issuer, due to potential regulatory consequences.
(i) Distribution and Publication of Rule 144A Pre-Sale Reports
Pre-sale reports for Rule 144A private placements rated by DBRS may be provided directly to the issuer, the investment banker(s) to the transaction, and/or to the qualified investors whose particulars have been provided to DBRS by the issuer or the investment banker(s).
Generally, pre-sale reports for these private placements and related press releases are published on the DBRS website subsequent to the public announcement of the transaction by, or on behalf of, the issuer.
(ii) Publication of Rule 144A Post-Closing Reports and Press Releases
Post-closing reports for Rule 144A sales and related press releases are published on the DBRS website.
DBRS provides issuers, or their agents, with a copy of pre-sale reports to review prior to release to ensure that the factual information is correct and that the report does not contain any confidential information. Post-closing reports are provided for similar review in the event of material changes occurring subsequent to the pre-sale report.
The distribution and publication of pre-sale and post-closing reports and related press releases in respect of private placement offerings in other jurisdictions is generally addressed with the issuer.
DBRS includes surveillance as part of its standard ratings activities in order to maintain the accuracy of its rating opinions.
DBRS monitors all of its outstanding structured finance public and private ratings on a regular basis. Surveillance activities are conducted within each business unit. The DBRS Structured Finance business units include Canadian Structured Finance (Asset-Backed Securities, Residential Mortgage-Backed Securities, Split Shares, and Covered Bonds), Structured Credit Canada (Collateralized Debt Obligations), U.S. Asset-Backed Securities, U.S. Residential Mortgage-Backed Securities, U.S. Structured Credit & Portfolio Ratings and Global Commercial Mortgage-Backed Securities. Each business unit has established surveillance procedures tailored to the specific underlying asset classes within the securities that they monitor.
DBRS requests that issuers supply it with performance information and data over the life of the transaction when a new rating is assigned, and the maintenance of a rating by DBRS is conditional upon the on-going timely receipt by it of this information and data. DBRS may also obtain additional information and data as part of its surveillance process. DBRS publishes surveillance information, indices that compile sector performance and commentary on its website, www.dbrs.com.
The performance information and data for each outstanding transaction is reviewed by DBRS surveillance analysts upon receipt, typically with the same frequency as the payments received on the rated debt (monthly or quarterly). In the event that asset pools underlying the security are performing outside of DBRS expectations, rating committees are generally convened to determine if any rating action should be taken. In addition, each outstanding rating within a structured finance transaction or conduit program is reviewed by a rating committee on a regular basis.
As feasible, DBRS maintains separate surveillance teams from the analytical teams that are responsible for the initial rating. The surveillance analysts, along with the lead analyst, back-up analyst and Managing Director, are responsible for ensuring the DBRS business unit surveillance procedures are followed. The number of transactions covered by each surveillance analyst varies with the complexity of the transaction and the experience level of the analyst, and is determined by each business unit's Managing Director.
DBRS maintains a current and comprehensive set of requirements and practices ("policies") to assist in governing its global business.
DBRS has in place a "Policy Committee", whose authority has been delegated by the Executive Group5. The Policy Committee's mandate is to recommend, approve and oversee the implementation of policies that impact in a significant or direct way the manner in which DBRS issues ratings and any legal or regulatory matter that is related to the issuance of ratings.
Essentially, Policy Committee:
Policy Committee members are appointed by the Executive Group. Policy Committee strives to meet on a monthly basis. Generally, all relevant materials are distributed to members and participants in advance, these materials are presented and discussed during the meeting, and following due consideration and discussion a vote is taken on a clear recommendation for the issue under consideration.
Policy Committee observes DBRS procedural requirements in respect of the following matters:
Policies outside the Policy Committee mandate or those related to operational or administrative matters are overseen by the Executive Group or other committees established from time to time.
The purpose of the Corporate Finance Criteria Committee (CFCC) is to ensure the integrity, objectivity and rigor of the methodologies used by all Corporate Finance groups ("Methodologies"); to ensure that all Methodologies are current and wholly representative of how DBRS issues ratings within each corporate industry; to ensure that Corporate Finance policies, procedures and processes are appropriately reviewed and applied consistently across all Corporate industry groups; and to review and opine on the feasibility of providing ratings for new Corporate industry groups.
CFCC shall:
CFCC voting members include the Chief Credit Officer, who acts as Chair and the President USA and Co-President Canada (Corporate) either of whom may assume the role of meeting chair in the event the Chief Credit Officer is unavailable. The Managing Directors of all the Corporate Finance groups are also CFCC voting members.
All CFCCs are comprised of highly experienced analytical personnel and other senior staff and management who have the requisite knowledge to participate in determinations regarding the issue before the CFCC.
CFCC is convened on a regular basis, and from time to time, as necessary, to address with any time sensitive or priority matter.
CFCC observes DBRS procedural requirements in respect of the following matters:
The purpose of the Structured Finance Criteria Committee (SFCC) is to ensure the integrity, objectivity and rigor of the methodologies and models used by all Structured Finance groups ("Methodologies"); to ensure that all Methodologies are current and wholly representative of how DBRS issues ratings within each sector and asset class; to ensure that Structured Finance policies, procedures and processes are appropriately reviewed and applied consistently across all Structured Finance groups; and to review and opine on the feasibility of providing ratings for materially new products and structures.
SFCC shall:
SFCC voting members include the Chief Credit Officer, who acts as Chair, and the President USA and the Co-President Canada (Structured Finance), either of whom may assume the role of meeting chair in the event the Chief Credit Officer is unavailable. The Managing Directors of all the Structured Finance groups are also SFCC voting members.
All SFCCs are comprised of highly experienced analytical personnel and other senior staff and management who have the requisite knowledge to participate in determinations regarding the issue before the SFCC.
SFCC is convened on a regular basis, and from time to time, as necessary, to address any time sensitive or priority matter.
SFCC observes DBRS procedural requirements in respect of the following matters:
1 A deteriorating transaction is a transaction that shows materially negative performance trends.
2 Watch List is a documented list of transactions that are prioritized for review and more rigorous monitoring. The placement of a transaction on this list does not necessarily mean that the rating will be downgraded, the trend will be changed or that the rating will be placed Under Review.
3 The DBRS "Executive Group" is comprised of the Chairman, the CEO, the President USA, the Co-Presidents Canada, and the Chief Credit Officer.
4 This policy does not apply to private ratings or ratings for certain private placement transactions.
5 See footnote 3.
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