AIRCRAFT FINANCING
The module calculates the probability of default, loss given default and expected loss for aircraft financing exposures. The results are aggregated and shown in annualized form and as a time profile. Transactions ranging from the acquisition of individual planes to that of entire fleets can be assessed.
All standard forms of financing, such as loans to airlines, finance leases, operating leases and warehouse facilities, can be treated adequately in dedicated sub-modules.
Special characteristics
The module is designed to cover the contractual arrangements of current financing structures. Participations in syndicated loans can also be processed due to the specific loss calculations performed for each tranche. The positive effects of favourable loan-to-value ratios (LTVs), efficient operating lessors or servicers (in the case of warehouse facilities), and of residual value and payment guarantees are considered in the default simulation in an adequate manner.
Loss-minimizing instruments such as ECAs (export guarantees), guarantees (payments guarantees, residual value guarantees, deficiency guarantees) and collateral (liquidity reserves, maintenance reserves, movable and immovable assets) can be included in the calculation. The loss amounts are calculated for each tranche, taking into account their individual collateralization and the seniority of the claim in an adequate manner. Cross-collateralized and cross-defaulted loans can be rated without difficulties.
The Aircraft Financing module in practice
In 2007 the module was revised and updated to reflect current trends in aircraft financing. It has been routinely reviewed every year since 2009. The module has good statistical accuracy due to a comparatively large database of almost 12,600 pooled ratings.
In late 2009, the module received supervisory approval for use under the IRBA for single-airline transactions, its main area of application.
BANKS
The Banks module can be used to rate any institution worldwide that does typical banking business and is accountable to a supervisory authority, irrespective of its legal form. This includes, among others, the following types of banks: financial supermarket, universal bank, investment bank, mortgage bank, savings and loans associations/building society, savings bank, cooperative bank, regional bank, bank holding, state-owned or government-related bank, supranational bank. A banking licence is not a prerequisite.
Special characteristics
The module is based on a scorecard approach. In addition to the quantitative and qualitative ratios, a banking system rating is also included in the calculation. In addition, the ownership situation, any potential government support, or membership in an institutional protection scheme are taken into account.
In order to ensure a global scope of application, the module distinguishes different geographic segments. Transfer risk is taken into account for foreign institutions.
Since the Banks module shares a number of methodological functions with the Insurance Companies module, there is potential for synergies if both modules are used.
The Banks module in practice
The module has been routinely reviewed every year since 2005. It has a very high statistical accuracy due to a large database containing almost 100,000 ratings.
In early 2007, the module received supervisory approval for use under the IRBA.
CORPORATES
The Corporates module is designed for rating companies worldwide. The module is divided into several submodules to reflect geographic differences.
Special characteristics
The rating algorithm is based on a scorecard approach, where quantitative and qualitative factors are combined using appropriate weights. For stock exchange-listed companies, the module additionally applies an option pricing based model.
In addition to the quantitative ratios, qualitative factors are also taken into account. Furthermore, the analyst can enter warning signals or store information on guarantee/support structures.
In order to ensure a global scope of application, the module distinguishes different geographic segments. Transfer risk is taken into account for foreign companies.
The Corporates module in practice
The module has been routinely reviewed every year since 2005 and was revised in 2012. It has very high statistical accuracy due to a large database containing almost 260,000 ratings.
In early 2007, the module received supervisory approval for use under the IRBA.
FUNDS
The ratings provided by the Funds module can be relevant for two types of exposures:
debt: loans to funds, repurchase agreements, derivative deals with funds, etc., i.e. exposures involving counterparty risk; credit institutions can use the ratings to calculate regulatory capital requirements
equity: these ratings can be used for internal risk management purposes.
Special characteristics
The module is based on a scorecard approach. It consists of the sub-modules “mutual funds” and “hedge funds”. The mutual funds sub-module covers equity funds, bond funds, money market funds, commodity funds and balanced funds. Some of the quantitative factors are calculated based on a complex portfolio model, which takes the country and asset allocation of a fund into account. In the hedge funds sub-module the fund strategy is an important factor. Different qualitative criteria which have a shown high discriminatory power are an integral part of the rating. Exceptional situations can be taken into account through overrides and warning signals.
The Funds module in practice
A large number of observations were used to develop the mutual funds sub-module. The hedge funds sub-module was developed from both own observations and a large external database. Based on these, it was possible to define very robust parameter values. The module has been routinely reviewed every year since 2009. In late 2009, it received supervisory approval for use under the IRBA.
INSURANCE COMPANIES
The Insurance Companies rating system is designed for rating companies that are commonly classified as insurers or generate more than 50% of their gross operating income from insurance business. All types of insurance companies and conglomerates focusing on insurance business can be assessed.
Special characteristics
The module is based on a scorecard approach. In addition to the quantitative and qualitative aspects, the ownership situation is taken into account. A distinction is made between the different accounting standards applied in the industry.
The module is divided into four sub-modules to reflect the heterogeneity of the insurance industry: life and health insurances form the “Life” segment, “Non-Life” covers property insurance and reinsurance, whereas “Reinsurance” is only used for this particular type of insurer. Very diversified insurance companies are assigned to the “Composite” segment.
Transfer risk is taken into account for foreign companies.
The Insurance Companies module in practice
The module has been routinely reviewed every year since 2006. It has very high statistical accuracy due to a large database containing more than 18,000 ratings.
In early 2007, the module received supervisory approval for use under the IRBA.
IINTERNATIONAL COMMERCIAL REAL ESTATE
The International Commercial Real Estate module is designed for rating commercial real estate projects. These may relate to individual properties or to real estate portfolios.
Special characteristics
The module is divided into several sub-modules, each of which corresponds to a specific financing purpose (investor, developer, etc.). A further segmentation is based on the main use categories, namely office, retail, residential, industrial, and operator (especially hotels). Detailed aspects of the transaction can be entered, including different tranches and unscheduled repayment clauses.
The module is simulation-based. 10,000 scenarios are created to reflect the general economic development, using Monte Carlo simulations. In a next step, a number of regional property markets are analysed and included in the simulation. These differentiated scenario estimates form the basis for the simulation of the future cash flows. Debt service and cash flows are compared and the causal structure determining the probability of default is reproduced.
The International Commercial Real Estate module in practice
The module has been routinely reviewed every year since 2005. The database contains more than 27,000 ratings.
In early 2007, the module received supervisory approval for use under the IRBA. Credit institutions can use it to determine regulatory capital requirements for locations outside Germany.
INTERNATIONAL REGIONS AND MUNICIPALITIES
The module is used to assess the economic ability and willingness of an international local government body outside Germany to meet its payment obligations in full and punctually. The module covers regions and municipalities below the level of federal government (country), which perform public sector responsibilities for private households and companies within their administrative areas and can levy taxes and other charges.
Special characteristics
The model is based on a scorecard approach and uses information about the country’s political and economic environment in addition to qualitative and quantitative data. Particular risks are taken into account using a special warning system.
In order to be able to map the different local administrative units in an adequate manner, a difference is made between municipalities and regions based on the NUTS /LAU classification defined by Eurostat. Different rating algorithms are applied depending on the segment and, in addition, for all regions and municipalities transfer risk is included in the rating as an input.
The International Regions and Municipalities module in practice
The module has been constantly updated since 2005. It has a good statistical prediction accuracy thanks to a comparatively large database of almost 7,900 ratings due to pooling.
In early 2007, the German financial supervisory authority granted the approval to use the module for the IRB approach.
LEASING
Leasing Companies
The module is intended for rating leasing companies that apply German accounting standards (HGB). It performs a net asset value calculation to take the specific characteristics of these companies into account. The rating model is based on a scorecard approach.
SPC Real Estate Leasing
The module, which uses both scorecard and simulation elements, is designed for assessing real estate leasing projects. The residual value of the property is estimated by simulation. Transfer risk is included for offshore transactions.
The Leasing module in practice
The module has been routinely reviewed every year since 2005. It has high statistical accuracy due to a large database of more than 17,500 ratings.
In early 2007, the module received supervisory approval for use under the IRBA.
LEVERAGED FINANCE
The module uses a scorecard-based approach and is suitable for rating traditional LBOs (leveraged buyouts), MBOs (management buyouts) and corporate-to-corporate transactions. It focuses on acquisitions involving substantial borrowing. The debt service is paid from the (future) cash flows of the target company.
Special characteristics
The rating model includes quantitative factors that are computed based on the cash flows of the target company as well as the equity and debt structure. Qualitative aspects, such as contractual arrangements, business plan, sector trend, etc. are also examined. Unusual circumstances can be taken into account through overrides and warning signals.
The module calculates the probability of default for the debt used for the acquisition. Both senior and subordinated debt are included in the calculation. The module is not limited geographically and can therefore be used for transactions worldwide
The Leveraged Finance module in practice
The Leveraged Finance module was developed based on a large number of real cases, which resulted in robust parameter settings. It has been reviewed annually since 2009, in which year it received supervisory approval for use under the IRBA.
PROJECT FINANCE
Usually, this module will be used to rate complex facilities such as power plants, industrial plants or infrastructure projects. The borrower is normally a special purpose vehicle. The module can be used universally and not only calculates the probability of default but also the loss given default and expected loss.
Special characteristics
Given the diversity of project finance transactions, nine main segments (e.g. transport, energy) and about 50 sub-segments (e.g. road and rail, power plants with PPA or Merchant arrangements) have been defined. Transactions can be specified in great detail. Transfer risk is taken into account for international projects.
The Project Finance module is a simulation-based rating system, which determines the expected cash flow of a financed project. For this purpose, 50,000 scenarios are generated using Monte Carlo simulations to describe future macroeconomic developments. These differentiated scenario estimates are taken as a basis for the simulation of the future cash flows. Segment-specific volatilities are included in the simulations. Debt service and future cash flows are compared. The result is used to model the causal structure determining the probability of default and the loss given default.
The Project Finance module in practice
The module has been routinely reviewed every year since 2005. It has high statistical accuracy due to a large database of more than 55,000 pooled ratings.
In early 2007, the module received supervisory approval for use under the IRBA.
SHIP FINANCING
The module calculates the probability of default, loss given default and expected loss of companies that were specifically established to finance single ships or fleets. It can model the different types of ship finance worldwide. An ordinary ship mortgage loan can be entered, as can an additional construction finance agreement or an equity bridge loan.
Special characteristics
The module is segmented in six main and more than 30 sub-categories so that it can be used for all types of ships.
The model is based on Monte Carlo simulations which generate 10,000 scenarios on the general economic development. In a next step, the global ship market is analyzed and included in the simulation. These differentiated scenario estimates are taken as a basis for a projection of the future cash flows for the financed object. The causal structure for the probability of default and the recovery rate is modeled by comparing the debt service and the future cash flows.
The Ship Financing module in practice
The module has been constantly updated since 2005. It has a very high statistical prediction accuracy thanks to a very large database of more than 51,600 ratings due to pooling.
In early 2007, the German financial supervisory authority granted the approval to use the module for the IRB approach.
SOVEREIGNS AND TRANSFER RISK
The probability of default of sovereigns is calculated for obligations in both domestic and foreign currency. Empirically, defaults in local currency are much rarer than defaults in foreign currency, since they are, to a certain extent, influenced by different factors. For this reason the module includes two separate submodules to treat both probabilities.
In addition, the Sovereigns and Transfer Risk module calculates the risk that a foreign company may be prevented from meeting its payment obligations in foreign currency by government-imposed restrictions. This rating can be referenced by other modules.
Special characteristics
The module is based on a scorecard approach. In order to be able to model all sovereigns in an adequate manner, a segmentation is applied based on a country’s level of development. This classification is updated annually. Different models are used for each segment. In addition, extensive special rules are implemented for euro countries, off-shore countries, etc.
The Sovereigns and Transfer Risk module in practice
The module has been routinely reviewed every year since 2005. It has very high statistical accuracy due to a large database containing more than 10,500 ratings.
In early 2007, the module received supervisory approval for use under the IRBA.
