Rating Methodology. Structured Finance and Securitisation. Global Master Structured Finance Rating Criteria Updated February 2016

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1 GLOBAL CREDIT RATING CO. Rating Methodology Structured Finance and Securitisation Global Master Structured Finance Rating Criteria Updated February 2016 Related Methodologies Global Asset Backed Commercial Paper Rating Criteria, updated December 2015 Global Project Finance Rating Criteria, updated December 2015 Global Collateralised Loan Obligation Rating Criteria, updated November 2015 Global Commercial Mortgage Backed Securities Rating Criteria, updated June 2015 Global Credit-Linked Note and Repackaging Vehicle Rating Criteria, updated May 2015 Global Trade Receivables Securitisation Rating Criteria, updated April 2015 Global Residential Mortgage Backed Securities Rating Criteria, updated April 2015 Global Consumer Asset Backed Securitisation Rating Criteria, updated April 2015 Introduction Global Credit Ratings Global Master Structured Finance Rating Criteria (the Criteria ) lays down the fundamental considerations for any Structured Finance transaction rated by GCR. Structured Finance transactions include all forms of asset backed securities, for example amongst others, transactions backed by residential and commercial mortgage loans, car loans, personal loans, consumer loans, equipment leases and structured credit. The Criteria is complemented by asset class specific criteria published by GCR, to be updated over time. The asset class specific criteria disclose any additional observations to or deviations from the Criteria. The main areas of attention when rating a Structured Finance transaction are an analysis of the soundness of the legal structure, the historical and expected performance of the underlying assets to be securitised, a review of the originator and servicer as well as any potential counterparty risk. All rating decisions are concluded by the rating panel process. This Criteria report is an update to the version published in February There are no significant amendments to the Criteria. The update of this Criteria will not have an impact on any existing Structured Finance ratings. Going forward, all new transactions will be rated using this Criteria. Global Credit Ratings Global Structured Finance Rating Criteria, Updated February 2016 Page 1

2 Structured Finance Ratings In Structured Finance, a rating is accorded in line with the contents of the transaction documents in particular the terms and conditions of the rated securities. The rating accorded is an opinion on relative credit quality. A rating may sometimes be qualified. An example is a rating that only covers ultimate payment of interest and principal, as opposed to timely payment. Another example is a rating that does not cover the potential early repayment penalty amount to be paid to the rated securities holders. Note that GCR is not a legal, tax or financial adviser and will only provide a credit opinion of the rated securities. For example, a rating does not cover a potential change in the applicable laws nor can it be regarded as an audit. Moreover, GCR is not a party to the transaction documents. Legal structure The primary principle for a cash flow securitisation is to isolate the credit risk of a pool of assets from the corporate credit risk of the seller of such assets. In order to achieve this, an originator sells a set of clearly identified assets to a separate company, a so-called special purpose vehicle ( SPV ). If the sale qualifies as a true sale, the SPV will be the legal owner of the assets and as such be entitled to the proceeds arising from the assets, even in the event that the seller becomes insolvent. GCR expects this delinkage to be described in a legal opinion. GCR s basic expectations regarding the SPV and the content of the legal opinion are listed in Appendices A and B respectively. The SPV will typically issue debt instruments to fund the purchase of the assets. GCR s ratings will cover the payment ability of such instruments in accordance with transaction documentation unless indicated otherwise. The assets should generate enough cash to service the debt instruments in all relevant rating scenarios. Investors in the debt instruments normally only have recourse to the assets of the SPV. Under a synthetic securitisation, no sale of assets takes place and risk is taken to a pool of reference exposures, for example via credit default swaps. As part of the legal review, GCR will also request a letter of confirmation from the issuer that the pool of assets forming security to the transaction has not been dual-ceded to another party. Financial analysis GCR will publish, on its website, further asset specific criteria reports which should be read in conjunction with this report. If no such asset specific criteria are available a transaction may be rated under these criteria with the asset specific methodology applied detailed within the transaction report. The financial analysis includes a review of the historical and expected performance of the assets to be securitised, and a cashflow modelling exercise that tests the availability of credit enhancement in the transaction under different rating scenarios. Credit enhancement can appear in different forms such as over-collateralisation, subordination, excess spread and guarantees. Credit enhancement is a key factor in a structure, as it is the mechanism that provides protection from losses on the underlying pool. Credit enhancement for the transaction should be proposed by the arranger through the capital structure. GCR will then in most instances calculate an expected loss rate to determine the appropriateness of the credit enhancement proposed, as well as perform cash flow modelling to test the availability of cashflows and credit enhancement in a stressed rating scenario. Credit-linked transactions do not provide for credit enhancement but are linked, in some form to the rating of the underlying entity or guarantee provider. Subordination is the most typical means of providing credit enhancement in a Structured Finance transaction. The subordinated class of notes and / or equity provides credit enhancement to the senior class of notes by having all losses on the asset pool allocated to it first until its balance is reduced to zero. Transactions are often tranched into multiple rating categories. Losses are usually apportioned firstly to the junior or unrated tranches. The junior tranche is typically protected by over-collateralisation, excess interest or a fully funded cash reserve. GCR analysts will review the documentation pertaining to the transaction, as well as legal opinions, to determine the robustness of the structure and that they are a true representation of the presented transaction. Legal opinions are also typically reviewed by external counsel. Opinions are expected to address the legal structure of the transaction, as well as address the legal, valid, binding and enforceable nature of the documents in respect of all relevant laws. For refinances or tap issuances, a new legal opinion may not be sought if a legal opinion has been provided within the past 12 months. Exceptions are where there has been a change to the transaction structure. It should be noted that GCR does not structure transactions nor provide structural advice. On the basis of, amongst others, the historical performance of the assets, GCR sets a base case scenario that is reflective of GCR s expectation of the performance of the assets during the life of the transaction. This includes an expectation of the cumulative defaults and recoveries likely to occur during the life of the transaction to derive an expected loss. GCR may also use data collected from sources other than the originator to derive an appropriate base case. Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 2

3 The base case assumptions are determined in a rating panel and subsequently stressed for the relevant rating scenarios. Typically a base case will correspond to a B (sf) rating. For higher ratings categories more severe stresses are applied to the base case. The setting of a base case scenario can differ per asset class, however a forward-looking approach is assumed. For example, for consumer Asset Backed Securitisation transactions the originator s historical portfolio information is used, whilst for a Collateralised Debt Obligation a Monte Carlo simulation estimates the securitised portfolio s future credit performance. Where a portfolio is exposed to concentrations, the transaction needs to be able to withstand a certain number of obligor defaults for each rating scenario. GCR also forms an opinion on how delinquencies, prepayments, recoveries and portfolio yield (excess spread) impact the transaction. The determined cumulative default and recovery rates (and their respective time vectors) are used as inputs to a cashflow model. To test the ability of the transaction to withstand stress in high rating scenarios, higher cumulative defaults and lower cumulative recoveries are assumed. The cashflow model attempts to mirror the transaction structure as accurately as possible, but in a practical manner. In addition to the elements mentioned in the previous paragraph, the cashflow model incorporates to the extent relevant running costs, transaction accounts, interest rate scenarios, liquidity facilities, swaps, the priority of payments and repayment profiles of the debt securities (sequential, pro rata or bullet redemption). The method described above particularly applies to assets with a fixed repayment profile. For assets with no fixed repayment profile, such as trade receivables and credit card receivables, dynamic methods are used to calculate the appropriate credit enhancement. Other considerations in the cashflow analysis are the repayment structure of the notes i.e are the notes revolving or amortising, do the notes repay pro rata, sequentially or upon bullet maturity. The type of structure will determine the stresses applied in the model. Pro rata structures ensure that principal and interest collections are paid proportionately to each tranche based upon its outstanding balance. Some asset classes are structured to ensure all unscheduled prepayments are paid fully to the senior tranches whilst the subordinated tranches only continue to receive their proportion of scheduled prepayments. This effectively prevents the subordinated tranches from receiving unscheduled principal collections and reduces the balance of the senior tranches faster, thus increasing the level of subordination. Alternatively, notes may be repaid via a sequential pay structure where the senior notes are repaid first. Sequential pay structures may also be based upon maturity, where the earliest maturing note may be repaid upon its maturity in full ahead of later maturing notes. Notes that pertain to a pro rata structure may convert to a sequential structure upon certain triggers being breached, typically linked to the performance of the underlying asset pool. In a pro rata transaction it is typical that the structure automatically reverts to a sequential structure upon 10% of the total aggregated issued notes remaining outstanding. Another structure typically seen is bullet maturity. Under a bullet maturity structure notes only receive interest on each payment date and do not receive principal collections. Principal collections are typically invested in new assets during the revolving period and are applied in a lump sum to redeem notes upon expected maturity. The timeframe of the revolving period is taken into consideration in the rating analysis and is typically between 1 to 2 years. However, in Structured Finance, evergreen transactions and frequent refinancing of transactions is also common. Counterparty risk Securitisations rely to a certain extent on counterparties such as the collection and issuer account bank, the hedge provider, the liquidity facility provider, the originator in its capacity as asset servicer, and issuers of securities in which the SPV may temporarily invest retained cash ( Permitted Investments ). In order to support a rating higher than that of the originator, GCR expects transaction counterparties to meet the counterparty criteria summarised in Appendix C. GCR expects at closing that transaction documentation incorporates its counterparty criteria. If transaction documentation does not incorporate these criteria, GCR s rating panel will factor this into the credit analysis, with one potential outcome being a rating cap. The potential capping of a rating depends on how important the counterparty is to the transaction. The underlying analytical assumption of the criteria listed in Appendix C is that a jump-todefault of the relevant counterparty within the specified remedial period is sufficiently remote to support the associated maximum achievable securities ratings. If a transaction relies to a large extent on a counterparty without the associated risks being properly mitigated, the rating of the debt securities is likely to be closely linked to that of the counterparty. For example, the rating of a credit linked note is likely to be closely linked to the corporate credit rating of the specific reference obligor. However, if a suitable Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 3

4 guarantee is in place, a higher rating may be possible in the event that the corporate credit rating of the guarantor is higher than that of the reference obligor. In a trade receivables transaction for example, given the nature of the underlying assets, the appropriate quantum of credit enhancement may have a link with the rating of the originator, particularly for noninvestment grade originators. Originator and servicer review As part of the rating process, GCR analysts will visit the originator to meet with key personnel and management involved in the transaction. Normally, the originator is also the servicer of the securitised asset pool. GCR expects the originator to provide a presentation that addresses, amongst others, the aspects listed in Appendix D. It is critical to perform an originator / servicer review, in order to form a qualitative assessment of the transaction. This consists of a review of underwriting / credit granting policies, as well as on-going origination, collections and servicing policies and procedures, to determine the ability of the originator to service and collect on the securitised portfolio. For existing transactions a review is expected to be carried out on an annual basis to assess changes to policies and procedures. In addition to the review, an independent audit opinion on the underlying collateral / portfolio is required for each transaction, except in cases where the collateral is fully insured by an external insurance counterparty. GCR may request an additional audit opinion where it is felt the auditor has a conflict of interest or is not a highly recognised audit firm. In instances where an audit opinion is not provided, GCR will do a file review on a random selection of files relating to the underlying collateral. GCR will form an opinion of the credit quality of the originator. In order to estimate correct proxies for the performance of the asset pool, GCR expects adequate historical performance information to be available. In the event that performance information does not include a full economic cycle, the rating panel might adjust the outcome of the base case calculations to more appropriately reflect the expected performance during the life of the transaction. Where insufficient information is available GCR may decline to rate a transaction. GCR prefers each transaction to be supported by a suitable back-up servicer at closing. GCR expects the back-up servicer to be a party that is capable of servicing the asset pool in the event that the servicer becomes insolvent or incapable of doing so. GCR expects the back-up servicer to be a party rated by an accredited rating agency, to have relevant experience and to have performed a collection systems review of the servicer. GCR expects to receive written confirmation from the back-up servicer that it can take over the collection function; providing an estimate of the time it would take and that it will receive periodically all relevant information enabling it to take over the function. GCR may also carry out a review of the back-up servicer s policies and procedures, as well as considering its experience and expertise in providing this function to other transactions. In transactions where the corporate credit rating of the originator is of sufficient quality, the back-up arrangements may be of a less restrictive nature. However, GCR expects that appropriate documents and arrangements are in place at closing to allow for a swift appointment of a back-up servicer upon material deterioration of the originator s credit rating. In the event that GCR is not comfortable that the back-up servicer will be able to efficiently take over the collection function, additional credit enhancement or liquidity arrangements may be necessary to support certain rating scenarios. GCR expects the back-up servicing agreement to include the full cost of assuming the back-up servicing function. A back-up servicer can only withdraw from this role with at least 6 months notice in which period a replacement back-up servicer would need to be found. In the event of non-performance, the SPV should be entitled to cancel the back-up servicing agreement without costs. In the event that the back-up servicer is not rated, GCR provides for a servicer quality rating where an opinion is formed on management and staff, systems and controls, debtor administration, arrears management and the financial strength of the back-up servicer. Rating panel process The transaction analyst presents an analysis of the proposed transaction to a rating panel. The rating panel consists of a quorum of a minimum 5 members. The quorum consists predominantly of members actively involved in the Structured Finance sector, including the head of sector as well as an independent member from another sector. The presentation covers an analysis of the asset pool, the legal structure, the financial structure, the originator / servicer and expected cash flows under different rating scenarios. The panel discusses the analysis presented and provides feedback to the transaction analyst. Multiple preliminary panels may be held before a rating is accorded. A rating is accorded by majority decision of the rating panel. The rating is communicated via a letter and, for public ratings in all cases where relevant, a detailed report and press release. An indicative rating may at first be accorded, with a final rating accorded following, for example, satisfactory completion and receipt of final / executed copies of transaction documentation. A report in respect of private ratings will only be Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 4

5 provided upon request of the arranger. The rating panel can either accord a national or an international scale rating, or both. In the event a national scale rating is accorded, the rating is followed by a suffix indicating the relevant country involved. A public, international rating may be accorded on a case by case basis as a straight mapping; for Structured Finance this is not considered appropriate. Credit- Linked Notes are an exception to this where a straight mapping is considered, in the majority of cases, to be sufficient given the reliance on the rating of the underlying counterparties. In a separate report, GCR will discuss in more detail the interaction between international and national scale ratings to Structured Finance transactions. Disclaimer Note that GCR is not a legal, tax or financial adviser and will only provide a credit opinion of the rated securities. For example, a rating does not cover a potential change in the applicable laws nor can it be regarded as an audit. Moreover, GCR is not a party to the transaction documents nor does it provide legal, tax or structuring advice. Contacts: Emma-Jane Fulcher Sector Head: Structured Finance Ratings fulcher@globalratings.net A long term rating is accompanied with an outlook that can be stable, positive, negative or evolving. A rating can also be put on rating watch, positive or negative, when appropriate. A long term rating is accorded where securities at closing have a legal maturity exceeding 12 months. A short term rating is accorded for shorter legal maturities, and no rating outlook is accorded. In the event that the accorded rating is a monitored rating (as opposed to a point-in-time rating), it should be noted that Structured Finance ratings in the most part are monitored ratings, and GCR will perform surveillance on the transaction s performance. In order to do so, GCR expects to receive from the asset servicer and SPV administrator periodic reporting packs, which should include all relevant information on the performance of the securitised asset pool, the securities outstanding and compliance with transaction documentation. The current performance of a transaction is compared against the expectation at closing. If a transaction performs better than the expectation, GCR s rating panel might consider upgrading a specific security, whilst a downgrade might be considered when the situation is reversed. Amongst other factors, a change in the rating of transaction counterparties may also trigger a periodic review of a transaction. As a minimum, GCR will perform a performance review of all Structured Finance transactions on an annual basis or as events warrant. Surveillance information for publically rated, Structured Finance transactions is available on GCR s website. Within its original analysis GCR will perform a sensitivity analysis, where appropriate, to determine the effect of change of key factors within and the likely impact they may potentially have on the rating of the notes. The sensitivity analysis is published, where appropriate, within the transaction s rating report. Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 5

6 Appendix A: Special Purpose Vehicle Features A properly established SPV should delink the credit risk of the securitised pool of assets from the credit risk of the originator. Amongst others, the following features typically apply to a SPV: The SPV is a stand-alone legal entity that can acquire rights and obligations. The SPV is set up as a bankruptcy remote entity. To achieve this, transaction parties agree that they can only rely on the proceeds of the securitised assets, are only paid in accordance with a predetermined priority of payments and are bound to non-petition language (i.e. they will not file for bankruptcy of the SPV unless all rated securities have been repaid). If the originator becomes insolvent, the SPV s assets do not form part of the originator s bankruptcy estate. The SPV has an independent board of directors with restricted powers. The flow of cash out of the SPV is controlled by an independent party. The SPV s activities are restricted by its formation documents. The SPV can only perform activities instrumental to the transaction, as described in the transaction documentation. The directors of the SPV have limited ability to change the formation documents. The SPV is not an operating business, does not engage any employees nor occupies any premises. The directors of the SPV cannot alienate or encumber its assets, nor incur obligations other than as agreed per the transaction documents. The directors of the SPV cannot reorganise the SPV. The ownership structure of the SPV cannot change. Dividends to be distributed out of the SPV, if any, can only be declared if, after payment, sufficient credit enhancement remains available in the transaction. Depending on the nature of the specific transaction, the securitised assets and the jurisdictions involved, different features may apply. Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 6

7 Appendix B: Legal Opinion GCR s legal assumptions are factored into the credit analysis and are expected to be supported by a satisfactory legal opinion which may be reviewed by external counsel. Depending on the nature of the specific transaction, the securitised assets and the jurisdictions involved, different assumptions may apply. Transaction parties The SPV is a bankruptcy remote entity. If the SPV is not a new entity, the opinion includes a description of potential risks, if any. All transaction parties have been duly incorporated / established, exist and are in good standing. All transaction parties have the power, capacity and authority to enter into and perform their obligations under the transaction documents to which they are a party. Any transaction documents to which the transaction parties are a party constitute legal, valid, binding and enforceable obligations against the relevant party. All transaction parties have obtained all necessary valid licenses, consents, authorisations etc. The opinion will cover any local legal, regulatory and / or tax requirements or consequences that may affect any transaction party, in particular the SPV. It should also cover compliance with all applicable Acts of Law such as, amongst others, Protection of Personal Information Act 4 of The entry into or the creation of the transaction documents does not contravene any relevant law. Transfer of assets and security The transfer of the assets from the originator to the SPV is a legal, valid, binding and enforceable sale. The sale withstands the insolvency of the seller and is enforceable against third parties and any insolvency official of the seller. In the event that legal title to the assets is not transferred at closing of the transaction, the opinion describes the mechanism how and when transfer of legal title happens and whether or not this creates any risks. The transfer of the assets is not re-characterised as a loan. A cession of collection accounts is legal, valid, binding and enforceable. The cession should withstand the insolvency of the party ceding the accounts and is enforceable against third parties and any insolvency official of the seller. Security granted to the SPV by whatever party is perfected, legal, valid, binding, and enforceable against third parties and any insolvency official. Cession, enforcement and validity of insurance policies, if applicable. Non-petition, limited recourse, subordination provisions Non-petition, limited recourse, subordination / priority of payments provisions are legal, valid, binding and enforceable obligations against all relevant parties (including hedge counterparties) and any insolvency official. Commingling risk If there is commingling risk in the transaction, the opinion describes this risk and the mitigants, if any. Set-off risk If there is set-off risk in the transaction, the opinion describes this risk and the mitigants, if any. Reasoned analysis To the extent insolvency or enforcement issues could have an impact on the transaction; the opinion includes a reasoned analysis on these risks. Tax opinion A separate tax opinion addresses all relevant taxes that could impact the transaction. Without limitation, this includes a description of the potential impact on the transaction of deferred tax liabilities, withholding tax, value added tax, stamp duty, transfer tax and corporate income tax. GCR is interested to understand how the transaction documents incorporate adequate provision for taxes in a cash reserve, where relevant. Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 7

8 Appendix C: Counterparty Risk Criteria Commingling risk upon insolvency of account bank Typical minimum Minimum ST bank Maximum LT rating Remedial action upon Maximum timing ST bank rating rating with remedial of securities downgrade of bank of remedial action action language in place A1+ A1 AAA 1. Replacement with a suitable bank 2. Obligations unconditionally and irrevocably guaranteed by a 20 working days suitable party 3. Any costs borne by the downgraded party A1 A1- AA- As per above 14 working days A2 A3 BBB+ As per above 5 working days < A2 NA Not higher than rating NA NA of counterparty Column 1 indicates the typically expected minimum short term rating in order to support the maximum security rating as per column 3. However, if remedial action language is in place as per columns 4 and 5, the short term ratings in column 2 suffice. GCR expects other parties, such as paying agents, to comply with the same rating thresholds as an account bank and money transfers should be made swiftly, preferably intra-day. Commingling risk upon insolvency of originator Minimum ST originator Maximum LT rating of Collections sweep frequency Maximum contractual rating securities from originator to SPV payment grace period A1+ AAA At least once per month 5 working days A1 AAA At least once per week 3 working days A2 AAA At least each working day 1 working day GCR prefers collection accounts to be in the name of the SPV or properly ceded to the SPV in order to completely mitigate the potential risk that asset collections commingle with funds in the insolvency estate of the originator. However, for originators rated A2 or higher, this risk may be suitably mitigated as indicated in the table above. For lower rated originators, more restrictive mitigants may be appropriate, e.g. additional credit enhancement. The commingling quantum is the maximum estimated asset collections during the commingling horizon. The commingling horizon is the number of days between each cash sweep (taking into account any contractual payment grace period, plus the assumed debtors notification period). Risk of default on Permitted Investments Minimum investment Maximum LT rating of Remedial action upon Maximum timing of rating securities downgrade of investment remedial action A1 or AA- AAA Replacement with a suitable investment Upon maturity of investment < A1 or AA- Not higher than rating of NA NA investment GCR expects investments to be of a short term nature and to mature at least 2 days prior to the next payment date in the transaction, and the investment to pay interest and principal in full at maturity of the investment. Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 8

9 Risk of non-payment of hedge counterparty Typical minimum Minimum ST Maximum LT rating Remedial action upon Maximum timing ST counterparty counterparty rating with of securities downgrade of of remedial action rating remedial action counterparty language in place A1+ A1 AAA 1. Replacement with a suitable party 2. Obligations unconditionally and irrevocably guaranteed by a 14 working days suitable party 3. Posting of collateral 4. Any costs borne by the downgraded party A1 A1- AA- As per above 10 working days A2 A3 BBB+ As per above 5 working days < A2 NA Not higher than rating NA NA of counterparty GCR expects swap documentation to be drafted such that it is ancillary to the mechanics of the transaction. For example, automatic termination events for the benefit of the swap counterparty need to be limited. GCR expects a collateral support agreement to be in place at closing of the transaction. GCR expects a potential termination net settlement payment to be paid by the SPV to the swap counterparty to rank junior in the priority of payments if the termination is caused by a default of the swap counterparty. Risk of non-payment of liquidity facility provider Typical minimum Minimum ST Maximum LT rating Remedial action upon Maximum timing ST counterparty counterparty rating with of securities downgrade of of remedial action rating remedial action counterparty language in place A1+ A1 AAA 1. Replacement with a suitable party 2. Obligations unconditionally and irrevocably guaranteed by a 14 working days suitable party 3. Fully draw the available limit 4. Any costs borne by the downgraded party A1 A1- AA- As per above 10 working days A2 A3 BBB+ As per above 5 working days < A2 NA Not higher than rating NA NA of counterparty In the event that the liquidity facility provider needs periodic renewal, GCR expects a renewal notice to be sent out at least 20 working days in advance. If the facility is not renewed, the SPV needs to fully draw the available limit before maturity. GCR expects the margin to be paid by the SPV exceeding the interest earned on the transaction account, to rank junior in the priority of payments. As indicated in the tables above, GCR s focus is on short term ratings, because the relevant time horizons will typically be of a short term nature. For transactions that incorporate hedges, this may be different and the inclusion of a long term rating threshold may be appropriate. GCR will determine this on a case-by-case basis. Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 9

10 Appendix D: Originator / Servicer Review Attention Points An overview of the business History Organisational structure Recent material developments Competition Market share statistics Financial performance and funding profile Prospects for the future A description of the main features of the assets to be securitised Biographies of senior management Written confirmation that no dual-ceding of the security pool has occurred, is expected to be received for all transactions An overview of the underwriting/ credit and collection policies An overview of the underwriting department and origination channels An overview of the credit department Experience of credit personnel Procedures for granting new credit Ageing policy Rehabilitation programs Collection procedures, including expectations for the future Write-off policies IT systems and disaster recovery An historical overview of the performance of the relevant asset book Dynamic arrears rates Dynamic prepayment rates Dynamic portfolio yield Static cumulative default rates by vintage Static cumulative recovery rates by vintage Portfolio composition by relevant characteristics, ideally for each vintage Other relevant performance information If possible, a comparison with the performance of competitors An overview of the proposed transaction and how it will be managed Depending on the specific transaction, other information may be requested In addition to the above a review of the back-up servicer may be deemed necessary In absence of an audit report a sample file review may be carried out Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 10

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13 GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR'S STRUCTURED FINANCE GLOSSARY Account Bank Administration Administrator Ageing Agreement Arranger Arrears Asset Asset Backed Securities Bankruptcy Bankruptcy Remote Bullet Maturity Capital Cash Flow Collateral Collateralised Debt Obligation Commingling Commingling risk Concentrations Corporate Credit Rating Credit Credit Default Swap Credit Enhancement Credit Rating Credit Risk Credit-linked Note Creditor Debt Debtor Default Default Risk A bank where the transaction account is held. A debtor unable to pay a judgement of debt or who cannot meet its financial obligations and does not have sufficient realisable assets that can be attached in satisfaction of judgement or obligations. The debtor can apply for an administration order interims of the Magistrates' Court Act 32 of 1944 (South Africa). A transaction appointed agent responsible for the managing of a Conduit or a Special Purpose Vehicle. The responsibilities may include maintaining the bank accounts, making payments and monitoring the transaction performance. The age of an asset or obligation. A negotiated and usually legally enforceable understanding between two or more legally competent parties. Usually an Investment bank that advises and constructs a transaction and acts as a conduit between the transaction parties: Client, Issuer, Credit Rating Agency, Investors, Legal Counsel and Servicers. General term for non-performing obligations, i.e. obligations that are overdue. An item with economic value that an entity owns or controls. Securitisation: debt securities issued that are backed or covered by a pool of assets or receivables (Auto loans and leases, consumer loans, commercial assets, credit cards, mortgage loans). Court proceedings at which an individual or a company is declared unable to pay its creditors. The liability of a bankrupt company typically exceeds its assets. A feature, through real security and guarantees that reduces the enforceability of a creditor against a Special Purpose Vehicle. Typically a Security Special Purpose Vehicle should be bankruptcy remote. The settlement of a security at maturity in a single principal repayment. The sum of money that is used to generate proceeds. A financial term for monetary changes in operations, investing and financing activities. An asset pledged as security in event of default. Junior tranches (that have a higher degree of default risk) of a securitisation transactions that have been repackaged into separate debt securities (according to their degree of risk) that utilise creditenhancement techniques to mitigate the risk. A CDO is created to distribute the prepayment risk amongst different classes of Notes. The mixing of various transaction parties' funds in an account. The risk that the funds payable to a counterparty may not be honoured due to temporary possession of funds by a Servicer or Administrator. A high degree of positive correlation between factors or excessive exposure to a single factor that share similar demographics or financial instrument or specific sector or specific industry or specific markets. A credit rating accorded to a corporate entity. A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company A form of insurance against non-performance of a third party's obligations. Limited protection to a transaction against losses arising from the assets. The credit enhancement can be either internal or external. Internal credit enhancement may include: Subordination; overcollateralisation; excess spread; security package; arrears reserve; reserve fund and hedging. External credit enhancement may include: Guarantees; Letters of Credit and hedging. An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories. The probability or likelihood that a borrower or issuer will not meet its debt obligations. Credit Risk can further be separated between current credit risk (immediate) and potential credit risk (deferred). Structured Credit Security that combines a bond or loan with a credit derivative or links it to a rated counterparty. The normal coupon repayments remains unchanged unless a credit event associated with a pre-specific reference obligation occur. CLN is similar to a Securitisation, except there are no assets transferred to the securitisation Vehicle. Either a securitisation vehicle or Issuer can issue a CLN. A credit provider that is owed debt obligations by a debtor. An obligation to repay a sum of money. The party indebted or the person making repayments for its borrowings. A default occurs when: 1.) The Borrower is unable to repay its debt obligations in full; 2.) A creditloss event such as charge-off, specific provision or distressed restructuring involving the forgiveness or postponement of obligations; 3.) The borrower is past due more than X days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors. The probability or likelihood that a borrower or issuer will not meet its debt obligations. Credit Risk can further be separated between current credit risk (immediate) and potential credit risk (deferred). Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 13

14 Downgrade Enforceable Enforcement Excess Spread Expected Maturity Exposure Guarantee Guarantor Hedge Hedging Income Insolvency Insolvent Insurance International Scale Rating Investment Grade Issuer Junior Tranche Lease Legal Opinion Liquidity Liquidity Facility Loan Long Term Rating Loss Market Monte Carlo Mortgage Loan National Scale Rating Non-investment Grade Noteholder Obligation Obligor Origination Originator Paying Agent The assignment of a lower credit rating to a corporate, sovereign of debt instrument by a credit rating agency. Opposite of upgrade. To make sure people do what is required by a law or rule et cetera. To make sure people do what is required by a law or rule et cetera. The net weighted average interest rate receivable on a pool of assets being greater than the weighted average interest rate payable for the debt securities. The expected maturity date of the Notes. In an ABS transaction, the maturity date is based on the underlying collateral's expected maturity, including prepayments. Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. An undertaking for performance of another's obligations in event of default. A party that gives the guarantee. A form of insurance against financial loss or other adverse circumstances. A financial risk management process or function to take a market position to protect against an eventuality. Taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative. Money received, especially on a regular basis, for work or through investments. When an entity's liabilities exceed its assets. When an entity's liabilities exceed its assets. Provides protection against a possible eventuality. International scale ratings relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale. Credit ratings equal to or higher than 'BBB-'. The party indebted or the person making repayments for its borrowings. A security that has a lower repayment priority than senior securities. Agreement or temporary use and enjoyment of a corporeal thing (movable or immovable property) the whole or part thereof for rent. The essential elements of a contract of lease are: 1.) Undertaking of lessor to give the lessee the use and enjoyment of something; 2.) Agreement between the lessor and lessee that the lessee's right to use and enjoyment is temporary; and 3.) Lessee's undertaking to pay a sum or rent. An opinion regarding the validity and enforceable of a transaction's legal documents. The ability to repay short-term obligations or short-term availability of liquid assets to a market or entity. A facility provided to a structured finance transaction that will pay the Noteholders interest in the event that the underlying assets cash flows are inadequate. A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond. A long term rating reflects an issuer's ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation's current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations. A tangible or intangible, financial or non-financial loss of economic value. An assessment of the property value, with the value being compared to similar properties in the area. A broad class of computational algorithms that rely on repeated random sampling to obtain numerical results. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond. The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a 'AAA' long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state. Credit ratings equal to or lower than 'BB+'. Investor of capital market securities. The title given to the legal relationship that exists between parties to an agreement when they acquire personal rights against each other for entitlement to perform. The party indebted or the person making repayments for its borrowings. A process of creating assets. An entity that created assets and hold on balance sheet for securitisation purposes. An appointed transaction party that is responsible for the payment of Noteholders scheduled Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 14

15 Payment Date Performing Prepayment Prepayment Rate Principal Priority of Payments Private Proceeds Property Provision Ranking Rated Securities Rating Watch Real Security Receivables Recourse Recovery Redemption Refinance Release Repack Repayment Reserve Fund Revolving period Risk Management Scheduled Interest Scheduled Principal Securities Securitisation Securitisation Vehicle Security Security Package Security Special Purpose Vehicle Security SPV Senior Servicer Servicing Set-off Settlement interest and principal, as well as other transactional obligations. The date on which the payment of a coupon is made. An obligation that performs according to its contractual obligations. Early or excess repayment of an obligation. Partial or full prepayment of the outstanding loan amount. The rate of prepayment in relation to the pool of obligations. Also called prepayment speed. The total amount borrowed or lent, e.g. the face value of a bond, excluding interest. In securitisation, the order in which the cash flows are allocated to the transaction parties. An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market. Funds from issuance of debt securities or sale of assets. Movable or immovable asset. An amount set aside for expected losses to be incurred by a creditor. A priority applied to obligations in order of seniority. Debt securities that have been accorded a credit rating. Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative. Obtained by a creditor when either as a consequence of agreement with a debtor or operation of law, the creditor acquires the right to be reimbursed from the proceeds of movable or immovable property of the debtor in the event of the debtor default. Real security includes: 1.) Pledge; 2.) Notarial bonds; 3.) Mortgage bonds; 4.) Liens or Hypothecs; and 5.) Cession to secure debt. General term for economic benefit derived from an asset. A source of help in a difficult situation. The action or process of regaining possession or control of something lost. To recoup losses. The repurchase of a bond at maturity by the issuer. The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place. An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations. Rearrangement of securities with the intent to be more attractive for investment. Junior tranches (that have a higher degree of default risk) of a securitisation transactions that have been repackaged into separate debt securities (according to their degree of risk) that utilise creditenhancement techniques to mitigate the risk. A CDO is created to distribute the prepayment risk amongst different classes of Notes. Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt. A funded account available for use by a Special Purpose Vehicle for one or more specified purposes. A reserve fund is often used as a form of credit enhancement. Typically accumulated over time, through excess cash flows. A period whilst all transaction covenants are adhered and no enforcement takes place. A going concern basis. Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity's operating philosophy. The interest payment due on a scheduled date. The principal payment due on a scheduled date. Various instruments used in the capital market to raise funds. Is a process of repackaging portfolios of cash-flow producing financial instruments into securities for sale to third parties. An entity that is created to fulfil specific objectives. Normally insolvency remote and created to isolate financial risk. An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default. Security offered to Noteholders for debt securities issued that should increase the recoveries in an event of default. A Special Purpose Vehicle that has been created to realise and hold the security of the performance of the obligations of the Issuer that sold its assets to the Security SPV. A Special Purpose Vehicle that has been created to realise and hold the security of the performance of the obligations of the Issuer that sold its assets to the Security SPV. A security that has a higher repayment priority than junior securities. A transaction appointed agent that performs the servicing of mortgage loans, loan or obligations. The calculation of interest and repayments, collection of repayments, advancing of loans, foreclose procedures, maintaining records and seeing that the proceeds of each loan are passed on to the respective party. Extinguishing of debts owed reciprocally by parties. Therefore automatically terminates the obligations of operation of law. (Four requirements have to be met for set-off: 1.) Debts must be similar in nature; 2.) Debts must be liquidated; 3.) Debts must be claimable; and 4.) Debts must be between the same parties. Full repayment of an obligation. Global Credit Ratings Global Structured Finance Rating Criteria, updated February 2016 Page 15