The world has changed. Traditional approaches used to set the level of program wide credit enhancement (PWCE) for ABCP programs fall short of quantifying the true default risk associated with such portfolios. These approaches such as the fixed percentage approach for multiseller ABCP programs or the obligor or security coverage approach for securities-backed programs, do not take into account many important portfolio characteristics that affect the portfolio default risk. Specifically, they do not fully account for the subtle portfolio characteristics such as asset type, correlaton, and rating distribution among other factors when determining the PWCE level. To address these factors, Fitch employs a VECTOR CP analysis for the securities backed and multi-seller ABCP programs it rates on a monthly basis and when evaluating new transactions to be included in the program to determine the default risk for a given ABCP portfolio.
When Fitch reviews a transaction being funded in a conduit, less focus is given to whether or not the individual transaction is "commensurate" with the rating of CP. Analyzing CP risk based on the merits of the individual transaction on a standalone basis does not fully account for the true risk. On the one end, even if each additional transaction is structured to be commensurate with the CP rating, first to default risk increases as more assets are combined into a portfolio, and the credit risk of the portfolio may not be commensurate with the CP rating. On the other end, even if a transaction is not structured to a credit quality commensurate with the CP rating, the level of PWCE may be sufficient to support the CP rating when the whole portfolio is analyzed. Because VECTOR CP is able to quantify the risk at the portfolio level, Fitch determines standalone ratings for each individual security or transaction and incorporates them into the simulation. The simulation results determine whether the ABCP rating can be confirmed or not.