In this report, S&P Global Ratings explains its data requirements and criteria application for rated Europe, Middle East, and Africa (EMEA) structured finance transactions comprising pools of nonperforming and reperforming loans (NPLs and RPLs). This Credit FAQ should be read in conjunction with "Data Requirements For Rating EMEA RMBS Transactions," "Data Requirements For Rating EMEA ABS Transactions," and "How Much Is Enough? Information Quality Standards For The EMEA RMBS And ABS Rating Process".
Frequently Asked Questions
What criteria are currently applicable for NPL and RPL new issue transactions?
As of June 15, 2021, for NPL transactions, we apply our "Global Framework For Assessing Securitizations Of Nonperforming Loans", and our "Principles Of Credit Ratings" criteria, along with our jurisdiction-specific asset criteria relevant for the particular pool, which forms the starting point of our analysis.
For RPL transactions, we currently apply our asset-specific criteria. We most commonly see RPL transactions of residential assets. In this case, our global RMBS criteria are directly applicable, according to which we apply the reperforming and originator adjustments to factor reperforming assets' increased risk.
What are the typical data for NPL and RPL transactions S&P Global Ratings expects to receive when applying its rating methodology? Are there any differences compared with transactions of performing assets?
For performing transactions across structured finance (covering residential loans, commercial real estate [CRE] loans, small and midsize enterprises [SME], and consumer loans), we typically request historical performance data (e.g., default, delinquency, and recovery/loss severity) spanning a minimum of three years, and for certain asset classes we also request loan-level data.
For NPL and RPL transactions we request the data that we typically request for a performing transaction. We also request additional supplementary information as described below. The lists are for illustrative purposes only and are not intended to be exhaustive as the data required may depend on the assets' characteristics.
If the pool comprises a mixture of nonperforming and reperforming assets we request data from both tables 1 and 2 below.
Table 1
| Data Requests For NPL Transactions | |
|---|---|
| Business plan |
NPLs require more intensive and specialized servicing, and we typically require a loan-by-loan business plan that describes how the servicer intends to recover the economic value of the assets for our analysis.
We expect this plan to include the expected recovery strategy, the timeline for recovery, any fees or costs, and the anticipated cash inflow upon recovery.
Where assumptions are made in the business plan, we request relevant data from the servicer to justify the assumptions used.
For pools containing multiple asset types, we also expect to receive detailed insight from the servicer on the differences in processes and forbearance timelines for the different asset types, along with insight on their experience in servicing similar portfolios. |
| Valuations |
Given that the analysis of an NPL portfolio is primarily a recovery analysis, where the portfolio or a portion of the portfolio is secured by property, valuations are a key driver of the analysis.
We typically expect to receive updated valuations for the portfolio, at least on a sample basis for NPL transactions.
Where both original and updated valuations have been provided for rated transactions, we used both sets of data, in line with our current global RMBS criteria. We compared the indexed original valuations to the updated valuation to establish the valuation used in our analysis. |
| Historical sales and loss data |
For all transactions irrespective of the nature of the assets, we request loan level historical sales (including auction sales price), and recovery and loss data from the servicer to assess whether the assumptions we use in our analysis are robust.
This is even more important for legacy assets secured by property, as the original property values may be overstated depending on the underwriting approach used by the originators at origination.
In the transactions we have rated so far, we have used these data to benchmark our assumptions and help assess whether any additional valuation haircuts are appropriate. We have also used the historical sales information compared to valuations to calibrate our market value decline assumptions.
For pools containing multiple asset types, we expect the performance data and historical sales data to be split by asset type.
For transactions including sizeable proportions of unsecured loans, we also expect to receive detailed historical recovery curves by vintage and asset subpool where relevant. |
| Due diligence reports |
We expect to receive an audit report to assess whether the data provided for our analysis are robust. We also review any other relevant supplementary due diligence reports available to make this assessment.
Audit reports and supplementary due diligence reports for legacy nonperforming assets typically highlight more errors than we see for standard transactions comprising more recently originated assets. This is often due to missing documentation and is commonly related to fields such as valuations, legal title issues, and original loan documentation.
If this is the case, we request additional details about these issues, any potential legal or enforceability implications, and whether any actions will be taken to rectify them.
This is an important aspect of an NPL analysis given that the transaction cashflows rely on recoveries, and any aspect that could affect asset enforceability could affect the analysis. |
Table 2
| Data Requests For RPL Transactions | |
|---|---|
| Pay rates |
We request historical loan level pay rates (payment due versus payment received) from the date that the restructuring arrangements were implemented for the pool.
In rated transactions, we have used this information to assess how sustainable the restructure agreements have been within the pool. |
| Restructuring arrangements |
We require historical information on restructuring agreements including details about each restructuring type. At the loan level, we require the restructuring date, restructuring type, and the date when each loan was last in more than three months in arrears.
We also request historical re-default curves by restructure type where available. |
| Valuations |
For assets backed by property, we expect to receive the original property valuation as a standard input to our loan-level template.
Where original valuations have previously been unavailable, we have received details about underwriting policies, specifically the loan-to-value (LTV) limits, any available re-underwriting due diligence results, and information regarding exceptions permitted at the time of origination to develop appropriate original LTV assumptions for the analysis.
In addition, where original valuations were unavailable, we have received updated valuations for our analysis.
Where both original and updated valuations have been provided for rated transactions, we have used both sets of data in line with our current global RMBS criteria. We compared the indexed original valuations to the updated valuation to establish the appropriate valuation used in our analysis. |
| Due diligence reports, historical sales, and loss data |
While these aspects are less of a driver for RPL transactions as the transaction cashflows are not as reliant on recovery inflows, we also request these points consistent with table 1 above.
In rated transactions, we have used these points to ensure the assumptions applied in our analysis are appropriate. |
| Cross collateralization and cross default | We have frequently analyzed pools in which loans are linked to multiple properties or where multiple borrowers may be cross collateralized and have cross default provisions in place, depending on the provisions in the loan contracts. Where these types of exposures exist within a pool, we request a common identifier that will help us link the loans, properties, and borrowers so we can consider the overall exposure in our analysis. |
What are alternative analytical considerations that you have used in the analysis when rating NPL and RPL transactions so far?
In our analysis of NPL transactions that we have rated so far, for which we have applied current NPL methodology, our starting point has been the asset-specific criteria relevant to the assets in the NPL pool, along with the business plan provided.
Where the portfolio primarily comprised just one asset type, we applied the asset-specific criteria for the analysis (adjusting certain assumptions where relevant) and benchmarked the cashflows from the business plan against the output of our analysis.
Where the pool composition was more complex, and comprised a mix of asset types, we used the cashflows from the business plan as the starting point and adjusted these according to the assumptions developed through the analysis.
Some of the more specific aspects and assumptions we considered are described in the table below.
Table 3
| Alternative Analytical Considerations | |
|---|---|
| Consideration | Approach used |
| Recovery timing |
For the recovery timing assumptions, we used our jurisdiction-specific asset criteria assumptions as a starting point, supplemented by information provided as part of the business plan. We considered the servicer's enforcement strategy and the recovery stage of the defaulted assets in our analysis. For example, in our analysis of Irish NPL transactions, we considered a longer time to recovery for assets intended to be resolved via the court process. We also considered a shorter recovery timing where a court order had already been granted for certain properties.
Our recovery analysis also depended on market characteristics. For example, in our analysis of recovery timings in Spain we also considered the stage of the legal process--if the asset had already been auctioned and was sitting with a REOCO pending sale in the open market. |
| Recovery costs |
For rated NPL transactions, we considered the expected recovery strategy for each asset type, along with the costs outlined for each type in the business plan.
We used this information to create cost assumptions for the transaction. |
| Market value decline |
For mixed asset pools, where the business plan's cash flows were the starting point for the analysis, adjustments to these cashflows and creation of appropriate market value decline assumptions were key to the analysis.
We used the assumptions from relevant asset-specific criteria for this analysis, benchmarked against relevant historical data provided. |
| Liquidity assumptions | Where we used the business plan for the cashflows in the analysis, we also considered additional liquidity stresses based on the time to sale of relevant properties in the jurisdiction. |
| Legal structure |
As with all structured finance transactions, there may be legal risks that we need to consider for the analysis. For example, in one of the transactions in our rated universe, the propcos were part of the VAT group of one of the servicers, and therefore could become jointly and severally liable for one of the group's other companies' unpaid VAT obligations.
We considered these types of factors in our analysis and adjusted where appropriate. |
| Pay rates | Some of the NPL transactions in our rated universe included large subpools of assets in arrears that had high pay rates. We gave credit to cash flows from these assets in our analysis, in certain rating categories, in cases where the assets had a high pay rate and the servicers' business plan stipulated that they intended to restructure these assets rather than go directly through the enforcement process. |
For RPL portfolios, as outlined above, we applied our asset-specific criteria directly, supplementing our analysis with the additional data requested and described in table 2.
Do potential ratings caps apply?
Rating caps for any structured finance transaction can be driven by any of the five pillars of the rating analysis. We have not applied explicit caps in our analysis simply because the transaction is nonperforming or reperforming in nature. However, we considered the specific features of the transaction structure by applying our criteria for each pillar.
NPL transactions tend to have a higher reliance on transaction servicing arrangements than performing transactions, given that the servicer's actions are key to the cashflows. Therefore, our operational risk assessment is an important factor in this analysis, which, depending on the servicing set-up within the transaction, could lead to a ratings cap for the transaction, in line with our operational risk criteria.
Counterparty risk caps may be implemented depending on the replacement triggers and remedies for downgrade implemented in the documentation.
Related Criteria
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
- Global Framework For Assessing Securitizations Of Nonperforming Loans, Sept. 7, 2016
- Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- How Much Is Enough? Information Quality Standards For The EMEA RMBS And ABS Rating Process, Jan. 8, 2019
- Data Requirements For Rating EMEA RMBS Transactions, Jan. 8, 2019
- Data Requirements For Rating EMEA ABS Transactions, Jan. 8, 2019
- How We Rate And Monitor EMEA Structured Finance Transactions, March 24, 2016
This report does not constitute a rating action.
| Primary Credit Analyst: | Sinead Egan, Dublin + 353 1 568 0612; sinead.egan@spglobal.com |
| Secondary Contact: | Alexandru Ciocan, Dublin + 353 (0)1 568 0613; alexandru.ciocan@spglobal.com |
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