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ARC publishes updated Global Criteria for Rating Trade Receivables-Backed Securitisations
26-02-2018

London, 26 February 2018 - ARC Ratings has published its updated Global Criteria for Rating Trade Receivables-Backed Securitisations. This is an update to the methodology previously published on 23 February 2017. There are no material changes and as such no rating impact. This methodology can be accessed at www.arcratings.com.


This Criteria (the “Criteria”) details ARC’s approach to rating trade receivables-backed securitisations. Each trade receivables securitisation is unique, reflecting industry, business and company specific influences, and the methodology may require certain adjustments depending on the specifics of each transaction. However, the following general approach can be used as a guideline for all trade receivables transactions, whether term transactions rated on a standalone basis or for inclusion in an ABCP conduit. ARC considers both qualitative and quantitative factors in its approach. In addition to the review of the originator / servicer and underlying collateral / obligor characteristics, ARC analyses the legal and structural issues as well as the operational capabilities of all key transaction parties in determining the appropriateness of credit enhancement provided before according a rating to a trade receivables transaction.


Trade receivables securitisations can enable access to investment grade funding even if the underlying corporate/originator does not have an investment grade rating. Structured finance ratings are based primarily on the creditworthiness of isolated assets or asset pools, whether sold or pledged to secure debt, without regard to the creditworthiness of the seller or originator. The structured finance transaction seeks to isolate transactions from entities that are either lowly rated or unrated. Since a worst-case scenario assumes the bankruptcy of each transaction participant, a key criterion for any securitisation is the sale of receivables to a special-purpose vehicle (SPV) that must satisfy bankruptcy remote criteria.
Trade receivables are unsecured obligations generated when a business sells goods or services on credit. Typically, they are non-interest bearing, obligors will be more concentrated than in a consumer ABS transaction, and performance is driven by the originator’s underwriting policies, strategic direction, financial condition and relationships with sellers. Assets turn rapidly, typically within 1 to 2 months. Receivables may be diluted for reasons other than payment or default; this maybe through product returns, refunds, incorrect invoice amount, rebates, warranty claims and disputes. The funding of trade receivables is usually a critical source of working capital to the originator of the receivables. Enhancement is driven by asset performance, granularity of the underlying obligors and dilution.


This Criteria applies solely to existing receivables i.e. where goods or services have been provided and where the amount of outstanding debt by the SPV plus required reserves is less than or equal to, at any time, the amount of eligible receivables in the securitisation pool. This Criteria does not apply to future receivables securitisations, where the full future amortisation of the SPV debt is contingent upon continuous replenishment of the pool, as the pool at any given time is less than the total outstanding debt.


This should be read in conjunction with ARC’s Global Structured Finance Criteria.

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