S&P Global Ratings' Small Business Portfolio Evaluator is an analytical model that helps issuers and underwriters assess the gross default and prepayment risk of small business loan portfolios. Small Business Portfolio Evaluator is built upon data from more than $1 trillion in outstanding small business loans -with the same analytical model used internally by S&P Global Ratings to rate small business loan securitizations.The model simulates portfolio default rates by using small business sector default history from the U.S. Small Business Administration (SBA)'s 7(a) loan guarantee program data.
Summary Description of the Model
The Small Business Portfolio Evaluator helps us assess the credit risk of a portfolio of small business loans. The model generates a probability distribution of potential cumulative default rates for the portfolio, which range from 0% to 100% of the assetsin the portfolio depending on the loans' age and the specific industries in which the small businesses operate. Often, the outcome is that some assets are expected to default, but not all. The model computes the projected portfolio default rate as the total dollar amount of assets defaulted, divided by the portfolio's total principal amount.
The Small Business Portfolio Evaluator is a one-period portfolio default model that stochastically simulates default events for each small business--or obligor--using a Gaussian copula framework, which is a formula for determining correlation. The model aggregates the defaulted assets' notional amount for each simulation trial, producing a probability distribution of the portfolio default rates.
This probability distribution describes the likelihood of any particular portfolio default rate occurring. After calculating the probability distribution, the model derives a set of scenario default rates to determine the assumed gross level of asset defaults for each credit rating stress scenario. We generally would expect that a tranche should be able to withstand the relevant assumed gross level of asset defaults consistent with the rating level and our rating criteria.
The Small Business Portfolio Evaluator is a stand-alone application with a Microsoft Excel interface that communicates, via xml and text files, to a C++ engine that performs the simulations.
