Bridgecorp Mortgage Trust No. 1 Credit Rating
20 May 2004
Bridgecorp Mortgage Trust No.
receives a credit rating from Rapid Ratings
Asset-Backed Securities Rating Report as at 17 October 2003 reconfirmed by a review of the portfolio as 7 May 2004.
Rapid Ratings has assessed the classes of preferred units in the Bridgecorp Mortgage Trust No.1 (BMT) as follows:
Class A has received a B3 rating, suggesting that asset quality is of reasonably good quality and is investment grade. A Credit Rating of B3 suggests that, with respect to the risk of non-payment of corporate debts and/or the degree of risk of insolvency, the preferred units are of moderate risk and are more subject to market conditions.
Class B has received a C2 rating, suggesting that asset quality is of reasonable quality and is sub-investment grade. A Credit Rating of C2 suggests that, with respect to the risk of non-payment of corporate debts and/or the degree of risk of insolvency, the preferred units are of generally medium risk.
Class C has received a D1 rating, suggesting that asset quality is of questionable quality and is sub-investment grade. A Credit Rating of D1 suggests that, with respect to the risk of non-payment of corporate debts and/or the degree of risk of insolvency, the preferred units are of high to medium risk.
These ratings were originally assessed as at 17 October 2003, based on the position as at 31 March 2003. The relative short term of assets in the portfolio means that the ratings are effective only as long as those assets predominantly remain in the portfolio or are replaced by assets of a similar quality. Rapid Ratings has re-examined the portfolio of assets as at 7 May 2004 and confirmed that the ratings given to each class of preferred units still apply.
These are the first credit ratings for the units in Bridgecorp Mortgage Trust No.1. The ratings remain in place for 12 months unless there is a material change in the trust.
These Credit Ratings are based on an assessment of the quality of BMT, most notably the quality of assets in the Trust, and the strengths and weaknesses of the form and substance of various arrangements that ensure the operation of the Trust at the time the review was undertaken. The assessment is based on an on-site discussion between the management of Bridgecorp Mortgage Trust No.1 and Rapid Ratings personnel and on other information provided by the Trust. The Manager provided Rapid Ratings with a dossier of the legal documentation upon which the Trust was founded and operates, and other management information as requested by Rapid Ratings during on-site interviews.
Copies of the Asset-Back Securities Rating Report may be purchased from Rapid Ratings.
Rapid Ratings is a subsidiary of ASX listed Collection House Limited (CLH) in Australia. Rapid Ratings, which has offices in Wellington, Auckland, Brisbane, Sydney and Munich rates companies in Australia, Canada, China, Japan, Germany, New Zealand, the UK and the US.
*For comparisons with ratings systems of other agencies, see tables 1 and 2 below.
Rapid Ratings Pty Limited is a global, independent corporate rating agency that uses unique on-line technology to assess credit risk and investment risk. Rapid Ratings’ client markets include, assessing risk concentration and exit and entry decisions in investment portfolios for institutional investors, private equity funds, assessing counter-party risk for large creditors and rating non-bank finance companies and listed company capital note issuers. This service is also designed for banks that wish to undertake back-testing to improve internal credit rating models in preparation for the regulatory changes required by central banks based on recommendations from the Basel Committee on Banking Supervision. Rapid Ratings is a subsidiary of ASX listed Collection House Pty Limited – one of Australia’s top 200 companies. Rapid Ratings rates over 1200 companies in the New Zealand and Australian markets and a growing list of companies in North America, Europe and Japan.
1.1 What is a Corporate Credit Rating and what is it used for?
A traditional credit rating is the considered opinion of the rating agencies regarding the general creditworthiness of a company. The credit rating process involves a legal, quantitative and qualitative, financial and non-financial evaluation of the company. The rating is a function of a variety of risk factors to which the company is subject. A rating is a formal independent evaluation of the company and its ability to meet the obligations of a short term or long-term commercial debt, or the repayment of equity to shareholders.
These corporate credit ratings
have widespread uses, notably risk signals for
• Investors or lenders regarding individual corporate issues of debt (e.g. bonds, commercial paper, letters-of-credit supported debt, mortgage-backed and asset-backed securities), equity (common or preferred shares) and project financing;
• Pension funds, mutual funds, investment funds, banks and insurance companies regarding the quality of their portfolios and exit and entry decisions;
• Lease negotiations, and
• General risk management signals about whether the company is too risky to deal with (this is especially true for inter-bank relationships and international trade).
1.2 New Generation of Corporate Credit Rating Tools
Rapid Ratings™ corporate credit rating and financial health assessment software is the leading edge of a new generation of financial analysis tools designed to provide clients with instant information based on a scientific approach. Our assessment utilises a company’s income statement and balance sheet data to produce a quick, but incisive assessment of the current quality of, and risks related to, a company’s financial performance and position. Our assessment uses or provides:
• World class,
peer reviewed models;
• Automated customized analysis for each client beginning with a comparison of a company’s strengths and weaknesses against global best practice
• Automated production of text, graphs, tables and forecasts (the forecasts are only available in the comprehensive credit rating assessment);
• An analytical pyramid with an overall alpha numeric credit rating and related score out of 100 at the top and an individual credit rating for each of up to 62 variables regarding financial performance and position relative to companies in the same global sector using a database with 25-30 years of financial information for tens of thousands of companies across more than a dozen countries;
• Each variable is weighted by sector-specific weights that can predict financial failure, distress, turnarounds or success; several sector-specific weighting methods have been used;
• A standard, easily understood credit risk ranking system and measurement scale (see Table 1 and 2);
• A detailed medium and long-term forecast of the company’s credit rating (available only in the comprehensive credit rating assessment); the forecasts use scientifically-derived weighted risk scores based on econometric modelling of the level of significance of industry-specific variables that predict financial failure, distress, turnarounds and success
• High volumes of ratings per day;
• Rapid production (in seconds) and rapid delivery (on-line in real time);
• Attractive prices.
• In the current and comprehensive assessments incorporate Dupont Analysis to separate operations from financing, while the EBIT result is compared to the cost of borrowing.
• Lifecycle performance analysis (including the historical movements in the company’s short-term credit rating.)
1.3 Credit Ratings Equivalence Table
Table 1 shows the equivalence in the corporate credit ratings scale between Rapid Ratings, Standard and Poor’s, Moody’s and KMV :
Rapid Ratings S&P Moody's KMV
A1 95 AAA Aaa 0.02
A2 90 AA aa2 0.04
A3 85 AA- aa3 0.06
80 A A2 0.11
B1 75 A- A3 0.19
B2 70 BBB Baa2 0.31
B3 65 BBB- Baa3 0.5
B4 60 BB+ Ba1 0.78
C1 55 BB Ba2 1.2
C2 50 BB- Ba3 1.7
C3 45 B+ B1 2.6
C4 40 B B2 3.6
D1 35 B- B3 5
D2 30 CCC+ Caa1 6.7
D3 25 CCC Caa2 8.8
D4 20 CCC- Caa3 11
E1 15 CC Ca 14
E2 10 C C 17
E3 5 D D 20
The Rapid Ratings’ credit rating scale ranges from 0 to 100, or from A1 to E4 (A1=low risk, E4=high risk). Each rating level covers a range of 5 percentage points. KMV’s credit ratings range from 0 (lowest risk) to 20 (highest risk). KMV’s lowest risk level is equivalent to S&P’s credit rating of AAA and Rapid Ratings’ credit rating of A1 (or 95 and above), while their highest risk level is comparable to S&P’s D and Rapid Ratings’ E3.
Standard and Poor’s ratings (AA+, A+, BBB+) are not listed but are implied and Moody’s equivalent ratings are also not listed but are implied.
While the Rapid Ratings scale appears to
be linear, this is not really the case. Owing to the way the
statistical distributions underlying the models for each
sector have been constructed, and the sector
specific-weights for each variable, companies make
non-linear movements over time on Rapid Ratings scale.
1.4 Rapid Rating’s Credit Rating Categories for Corporate Credit Rating and Asset Quality Branding
Table 2: Rapid Ratings’ Credit Rating Categories for
CREDIT RATING & ASSET QUALITY BRANDING TM
Outlook EXPLANATION: with respect to the degree of risk of non-payment of corporate debts and/ or the degree of risk of insolvency. ASSET QUALITY BRAND™
TIER A A1 Minimal risk of non-payment and insolvency Exceptionally high quality
A2 Exceptionally low risk Very high quality
A3 Very low risk High quality
A4 Low risk but there are some concerns Moderately high quality
TIER B B1 Moderate to low risk and somewhat subject
to fluctuations in market conditions Very good quality
B2 Generally moderate risk Good quality
B3 Moderate risk / more subject to market conditions Reasonably good quality
B4 Moderate risk that can worsen with market conditions Moderately good quality
TIER C C1 Medium to moderate risk and generally subject
to fluctuations in market conditions Satisfactory quality
C2 Generally medium risk Reasonable quality
C3 Medium risk / more subject to market conditions Still medium quality
C4 Medium risk that can worsen with market conditions Periodic concerns
TIER D D1 High to medium risk and very subject
to fluctuations in market conditions Questionable quality
D2 Moderately high risk / increasingly at risk Seriously questionable
D3 Still high risk Speculative
D4 High risk of non-payment Very speculative
TIER E E1 High risk of failure which is unlikely to improve with better market conditions Exceptionally poor quality
E2 Very high potential for payment default Seriously impaired
E3 Still trading but likely under extreme creditor pressure Bad & doubtful
E4 Still trading but possibly insolvent Non-performing