Pro Rata Features in European ABS: Risk Sensitivities
This commentary reviews the additional credit risks sensitivities associated with pro rata transactions and the different factors that may determine when sequential redemption triggers are breached.Summary highlights include:
-- Consumer and auto lenders have increasingly used pro rata amortisation structures for funding to achieve significant risk transfer.
-- Pro rata transactions seem to be highly sensitive to the timing of the triggers' breach and how the triggers interact with the realised credit performance of the portfolios, potentially leading to rating volatility.
-- DBRS Morningstar considers the length and shape of the default timing curve and prepayment assumptions to be the driving factors in its cash flow analysis.
“Pro rata structures tend to be very sensitive to cash flow assumptions, such as prepayment levels, default timing, and how triggers are designed”, said Guglielmo Panizza, Vice President of European ABS at DBRS Morningstar.
DBRS Morningstar is a global credit ratings business with 700 employees in eight offices globally. DBRS and Morningstar Credit Ratings are committed to empowering investor success, serving the market through leading-edge technology and raising the bar for the industry.
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