European credit rating markets reached a landmark on 16 December when the European Central Bank (ECB) completed its onboarding of Scope’s ratings in the Eurosystem credit assessment framework (ECAF). Scope-rated debt instruments are now eligible as collateral in ECB monetary policy operations.
This is the first time the Eurosystem has used the risk assessments of a European rating agency. The ECAF integration has already led to accelerated investor and issuer demand for Scope’s ratings to enable them to leverage the benefits of greater diversity of credit opinion to help manage credit risk exposures. At the same time, issuer and investor dependence on the rating market dominated by North American rating agencies is reduced.
The ECB formally accepted Scope’s sovereign, corporate, financial institution, and covered bond ratings in ECAF in November 2023. ABS ratings followed in May 2024.
Securitisation a core goal of CMU
Scope’s onboarding marks an important step not just to strengthening European financial sovereignty but also in pursuit of capital markets union (CMU). The ECB’s acceptance of Scope’s ABS ratings is an additional step in supporting the growth of the European securitisation market, a core goal of CMU, as it adds an independent credit opinion to the market.
Structured finance is a particular strength of Scope, whose structured finance team covered 405 instruments across 179 transactions as of June 2024. This brought total rated volumes since 2014 to EUR 286bn.
Scope’s analytical coverage and setup
Scope’s ABS ratings cover a wide range of asset classes, reflecting deep domain expertise across auto and consumer ABS, RMBS, SME ABS, CRE loan/CMBS, private credit-linked debt and collateralised loan obigations.
Scope’s General Structured Finance Methodology is complemented by six asset-class-specific methodologies that capture asset-class pecularities and foster transparency, understanding and replicability. Transparency lies at the core of Scope’s proposition so market participants have free access to detailed methodologies, new-issue reports for public transactions and related research.
For all asset classes, Scope applies a fundamental opinion-driven credit analysis, with no mechanistic ratings cap linked to sovereign ratings.Using the example of auto ABS, it means that all auto ABS transactions can potentially achieve AAA ratings, irrespective of their jurisdiction. Scope’s rating analysis takes a forward-looking view on performance, with no one size fits all, enabling analytically different outcomes. Like all structured finance asset classes, auto ABS ratings are derived from a fundamental bottom-up and expected-loss approach.
Data from originators helps determine key analytical assumptions such as default distribution, recovery rates and related timings. The analysis applies increasing haircuts to base-case recovery rate assumptions as the target rating becomes higher. In areas like auto ABS, limited vintage data does not prevent rateability.
Comparability across transactions is achieved via the use of transparent key analytical assumptions, while ease of use is facilitated because there is no pre-defined data tape format. The analytical process is efficient and ensures fluid communication: the end-to-end rating process takes an average of five weeks for standard transactions.
Scope is able to assess auto asset-backed instruments (inventory finance, rental fleet) or lease and loan ABS with residual value or voluntary termination risks.