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Essential Intelligence: Models

Structured Credit Products

Structured Credit Products (Small Business Portfolio Evaluator and Market Value Evaluator)

Our structured credit products provide analytical modeling and data capabilities for performing credit, cash flow and detailed asset analyses.

Small Business Portfolio Evaluator

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.

Market Value Evaluator

S&P Global Ratings uses its Market Value Evaluator (MVE) modelto apply haircuts to certain fixed-income, equity, and structured finance securities held by transactions that itrates using itsmarket value criteria.

The S&P Global Ratings Market Value Evaluator (MVE) incorporates our quantitative methodology and assumptions for rating market value securities transactions as outlined in our criteria. The S&P Global Ratings Market Value Evaluator estimates the minimum sale realization by reducing, from the securities' current market value, the market value loss the criteria assume could occur when such securities are sold during different periods of economic stress. The periods of economic stress the S&P Global Ratings Market Value Evaluator estimates are commensurate with the stress levels our rating categories imply.

Summary Description of the Model
The MVE is a Microsoft Excel application programmed in VBA (Visual Basic for Applications) programming language. The MVE incorporates tables outlining expected market value drops (haircuts) that different types of securities could suffer during different periods of economic stress perour published criteria. The haircut tables only apply to transactions that own eligible assets under the criteria and that meet certain diversification parameters and other relevant criteria. Cash is an eligible asset; however, the model gives no haircut on cash assets.

The MVE incorporates and implements the assumptions, haircuts, and diversification rules described in our criteria.

The model uses the attributes of each eligible asset to look up its applicable haircut and uses those same attributes to compute the diversification and related criteria tests to determine if additional haircuts are required. The MVE reduces the market value of each asset by its total haircut (the sum of the asset's corresponding base haircut plus any applicable additional haircut) to determine its minimum estimated realization value. The MVE sums the estimated realization values of all of the assets in the transaction and compares the results to the outstanding principal balances of the liabilities to determine the highest rating they can achieve.

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