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Methodology
Asset-Backed Commercial Paper

Criteria Report: U.S. ABCP
Conduits Credit and Liquidity
january 2007
frankfurt
author
Matthew La Capra, CPA
contact information
Andrew Jones
Managing Director, Structured Finance
TEL +1 212 806 3250
ajones@dbrs.com
Matthew La Capra, CPA
Senior Vice President, Structured Finance
TEL +1 212 806 3259
mlacapra@dbrs.com
R. Dorothy Poli
Senior Vice President, Structured Finance
TEL +1 212 806 3261
dpoli@dbrs.com
DBRS is a full-service credit rating agency

established in 1976. Privately owned and operated
without affiliation to any financial institution,
DBRS is respected for its independent, third-party
evaluations of corporate and government issues,
spanning North America, Europe and Asia.
DBRSs extensive coverage of securitizations
and structured finance transactions solidifies our
standing as a leading provider of comprehensive,
in-depth credit analysis.
All DBRS ratings and research are available in
hard-copy format and electronically on Bloomberg
and at DBRS.com, our lead delivery tool for
organized, Web-based, up-to-the-minute information. We remain committed to continuously
refining our expertise in the analysis of credit
quality and are dedicated to maintaining
objective and credible opinions within the global
financial marketplace.
U.S. ABCP Conduits Credit and Liquidity January 2007

January 2007
Asset-Backed Commercial Paper Criteria Report:

U.S. ABCP Conduits Credit and Liquidity
table of contents
The DBRS U.S. Asset-Backed Commercial Paper Conduit Rating
Primary Risks of ABCP
DBRS Short-Term Rating
Commercial Paper Fundamentals
Basic Mechanics of ABCP Structures
ABCP Conduit Revolving Phase
ABCP Conduit Wind-Down Phase
Conduit Classifications
Conduit Types
Conduit Liabilities
Conduit Credit Variations
10
Conduit Liquidity Variations
10
Credit Risk
Transaction-Specific Credit Enhancement
11
11
Types of Analysis at the Transaction Level
11
Transaction Characteristics
11
Transaction-Level Credit Enhancement
12
Transaction-Level Triggers
14
Program-Wide Credit Enhancement
15
PWCE Rationale
15
Risk Factors
15
Risk-Mitigating Factors
15
Net Effects
15
Sizing PWCE
16
Excess PWCE
16
Program-Level Structural Features
16
Key CP Cease Issuance/Asset Purchase Tests
16
Minimum PWCE Test
16
Other General Program-Level Structural Features
16

January 2007
Other Risks
Interest Rate Risk
17
Interest Rate Mitigant Transaction-Level
17
Additional Interest Rate Mitigant Transaction-Level
17
Interest Rate Mitigants Program-Level
17
Foreign Exchange Risk
18
Foreign Exchange Mitigants Transaction-Level
18
Foreign Exchange Mitigant Program-Level
17
Commingling Risk
Commingling Mitigant Transaction-Level
18
18
Additional Commingling Mitigant Transaction-Level
18
Commingling Mitigant Program-Level
19
Dilution Risk
Dilution Mitigant Transaction-Level
19
19
Additional Dilution Mitigant Transaction-Level
19
Dilution Risk Mitigant Program-Level
19
Liquidity Risk
20
General
20
Forms of Liquidity Agreements
20
Same-Day Funding
20
Liquidity Funding Formula
20
Rating Requirements for Liquidity Support
21
Liquidity Covering Other Risks
21
Liquidity Covering Credit Risks
21
Exceptions to Liquidity Funding
21
Rating Process and Documentation Review
23
Rating Process Initiation
23
Conduit Rating Program Analysis
23
Conduit Confirmations Transaction Analysis
23
Asset Transfer Agreement/Receivable Purchase Agreement
23
Liquidity Agreement
24
Surveillance
17
24
Monthly Review
24
Annual Review
24

January 2007
The DBRS U.S. Asset-Backed

Commercial Paper Conduit Rating
primary risks of abcp
dbrs short-term rating
U.S. asset-backed commercial paper (ABCP) is a

short-term debt instrument issued by a conduit
and backed by a variety of individual asset-backed
transactions. In order to issue a short-term rating on
commercial paper (CP) issued by an ABCP conduit,
DBRS analyzes the comprehensive risk profile of the
conduit, focusing on the four primary risk areas,
two of which, credit risk and liquidity risk, will be
examined closely in this report:
General
Regardless of the debt instrument the conduit
issues, DBRS rates to the CP investor being paid in
whole and on time. Payments that are not timely
or complete constitute a default.
The chart below illustrates how DBRSs short-term
ratings approximately correlate with other rating
agencies short-term ratings.
Credit risk.
More Gradations
Liquidity risk.
Legal risk.
Operational risk.
This report generally does not cover legal and
operational risks with respect to ABCP conduits.
With more short-term rating gradations than other

rating scales, DBRS offers CP investors more
information and transparency. DBRSs ratings
of R-1 (high), R-1 (middle) and R-1 (low) on an
ABCP conduit range from a AAA to an A (low)
risk profile. DBRS believes that investors can
better understand risks inherent in ABCP portfolios through more granular short-term ratings.
Short-Term Ratings Scales Comparison

DBRS
S&P
Moodys
Fitch Ratings
R-1 (high)
A-1+
P-1
F1+
R-1 (middle)
A-1+
P-1
F1+
R-1 (low)
A-1
P-1
F1
R-2 (high)
A-2
P-2
F2
R-2 (middle)
A-2
P-2
F2
R-2 (low)
A-2
P-2
F2
R-3
A-3
P-3
F3
All ratings below R-3
All ratings below A-3
All ratings below P-3
All ratings below F3

January 2007
Commercial Paper Fundamentals

An ABCP conduit is a special-purpose vehicle that
is structured to be bankruptcy remote and legally
separate from its sponsor. The conduit acquires
assets via an asset purchase or a secured lending
transaction. Some common assets or asset interests
that ABCP conduits finance are trade receivables,
auto and equipment loans and leases, credit-card
receivables, mortgages and collateralized debt
obligations (CDOs). ABCP is generally limited to a
270-day tenor and is issued on either a discount or
interest-bearing basis.
basic mechanics of abcp structures

ABCP Conduit Revolving Phase
An ABCP conduit is a vehicle that is usually intended
to last until a program wind-down occurs. CP is
issued against transactions that have been accumulated over time. During the revolving phase, an
ABCP conduit typically acquires and retires transactions at the same time as it issues and retires CP.
Payment of Interest on Commercial Paper
and Conduit Fees: Although interest is typically

covered transaction by transaction by the liquidity
facilities, the conduits sponsor and/or administrator designs the program to cover interest and CP
conduit fees in one of two ways:
ABCP Conduit Wind-Down Phase

Voluntary Wind-Down: For various reasons,
program sponsors may choose to wind down a CP

conduit. In this case, the portfolio of transactions
may naturally amortize. During the natural amortization of the transactions within the conduits
portfolio, maturing CP is typically paid by both
collections from the assets and from issuing new
CP. This will recur until the conduits transactions
are completely amortized. Alternatively, banks
may choose to fund some or all of the transactions with a liquidity facility, thereby immediately
removing any or all of the transactions from the
conduit.
Involuntary Wind-Down: An involuntary
conduit wind-down may occur if the conduit

breaches specific program triggers that are set
out at the conduits inception. The ProgramLevel Structural Features on page 16 outlines
some of the material triggers that would invoke
an involuntary conduit wind-down.
conduit classifications
Several features distinguish conduits from one
another:
Conduit Type: Key conduit types are multi-seller,
Interest-Bearing Assets: For transactions that
have underlying interest-bearing assets, typically interest collected on the assets pays the
interest on the CP and the conduit fees.
Non-Interest-Bearing Assets: For transactions
that have non-interest-bearing assets, typically

additional reserves in the form of overcollateralization are established to cover interest and
conduit fees.
Payment of Principal on Commercial Paper:
During the revolving phase, the conduit will

issue new CP in order to retire maturing CP in a
process called rolling the CP. CP can only be
rolled against performing transactions. Rolling
the CP typically repays 100% of the principal
component of maturing CP.
6
single-seller, arbitrage programs, hybrids and

structured investment vehicles (SIVs).
Conduit Liabilities: The general types of debt
issued are CP, extendible CP and medium-term

notes (MTNs).
Conduit Credit Variations: All conduits are
either fully or partially supported.
Conduit Liquidity Variations: The liquidity
facilities provided to conduits are either full or
partial/alternative.
The criteria and methodologies described in this
publication generally relate to partially supported
multi-seller programs, which are the most prevalent type of conduit in the U.S. ABCP market.

January 2007
Conduit Types
Multi-Seller Conduit
General: A multi-seller conduit is a limitedpurpose, bankruptcy-remote vehicle that
provides funding to a multitude of unaffiliated originators/sellers in exchange for asset
interests.1 Individual sellers assets are acquired
transaction by transaction, typically accumulating into a diversified portfolio across asset
types and industries to support the CP issued
by the program.
Credit: Each transaction that is added to the
conduits portfolio must be structured and/or
credit enhanced so that the resulting risk profile
of the CP conduit is commensurate with its
CP rating. Program-wide credit enhancement
(PWCE) is available as a fungible layer of
credit enhancement across all transactions (see
Program-Wide Credit Enhancement beginning on page 15 for more details). An integral
part of assessing the CP risk profile of a conduit
is the size of its PWCE relative to the size and
composition of its portfolio of transactions.
Liquidity: A liquidity bank, typically the
conduits bank sponsor, provides a liquidity
facility for each transaction to address timing
mismatches between the payment streams
of the assets and the CP maturity dates or
to repay CP investors in the event that CP
cannot be rolled, including a market disruption.2 Liquidity facilities typically do not fund
for defaulted assets. Sponsor banks providing liquidity may use the facility to transfer
the transaction out of the conduit for any
reason. As an alternative to traditional liquidity facilities, multi-seller conduits may have an
extendible CP feature. Please see Extendible
Commercial Paper on page 10 for more
details on extendibles.
Single-Seller Conduit
General: A single-seller conduit is a limitedpurpose, bankruptcy-remote vehicle that
provides funding to a single seller in exchange
for interests in its pool of receivables. Single-
seller programs are popular among large

credit-card issuers, major auto manufacturers
and mortgage originators.
Credit: As is the case for multi-seller conduits,
single-seller conduits acquire transactions that
are structured and/or credit enhanced so that
the resulting risk profile of the CP conduit
is commensurate with its CP rating. Credit
enhancement addresses historical and projected
asset deterioration at a particular rating level
commensurate with the risk to the CP investors.
Liquidity: As in the case of multi-sellers, the
liquidity provider(s) address timing mismatches between the payment streams of the
assets and the CP maturity dates or issues that
arise when CP cannot be rolled, including
a market disruption. If the sellers shortterm rating is high enough, it may serve as
the liquidity provider. If not, one bank or a
syndicate of liquidity banks may serve as the
liquidity provider(s). As an alternative to traditional liquidity facilities, single-seller conduits
may have an extendible CP feature. Please see
Extendible Commercial Paper on page 10
for more details on extendibles.
Arbitrage Conduit
General: An arbitrage conduit is a limitedpurpose, bankruptcy-remote program
that invests specifically in explicitly rated
securities. Generally, the primary impetus
for forming these vehicles is an arbitrage
motive. Arbitrage conduits typically buy
high-yield or longer-term securities or
both. They fund these securities with lower
costing and shorter-term CP and collect the
resulting spread.
Credit: Arbitrage programs are primarily
composed of explicitly, highly rated transactions. Each transaction that is added to the
conduits portfolio must be rated appropriately
such that the resulting risk profile of the CP
conduit is commensurate with the rating on
the CP issued. An explicit rating addresses the
timely payment of periodic interest and ultimate
payment of principal on the legal final date.
1 The conduits portfolio consists of transactions collateralized by underlying assets. Such underlying assets are referred to herein as underlying assets,
assets or collateral. The conduits interest in these transactions is referred to herein as asset interests.
2 Market disruption in the CP market results in investors ceasing to purchase CP.

January 2007
PWCE is required as needed depending on the

mix of the ratings of the transactions within the
conduits portfolio.
Liquidity: Traditionally, liquidity would fund
for the principal and interest on the CP unless
the securitys or, if applicable, the third-party
enhancers3 rating migrated downward to near
default status. However, regulatory changes
have spurred liquidity, in some programs, to
cover only investment-grade assets. The latter
necessitates additional credit enhancement or
structural features in those particular transactions. Similar to the multi- and single-seller
programs, as an alternative to traditional liquidity facilities, arbitrage conduits may have an
extendible CP feature.
Hybrid Conduits
General: A conduit that has more than one
feature can be characterized as a hybrid. A
common hybrid is the multi-seller arbitrage
conduit, which both provides financing for
a multitude of sellers and also purchases
explicitly rated securities. As a result, a hybrid
conduit has similarities to both arbitrage and
multi-seller conduits.
Credit: The transactions that hybrid conduits
acquire must be structured and/or credit
enhanced so that the resulting risk profile of
the CP conduit is commensurate with its CP
rating. For sellers, the credit enhancement
can be in the form of overcollateralization,
subordination, excess spread, third-party
guarantees, lines of credit (LOCs) and other
types. As is the case for both multi-sellers and
arbitrage conduits, PWCE is available as a
fungible layer of enhancement across all transactions, although some explicitly, very highly
rated4 transactions may not be required to post
PWCE but typically can still benefit from this
extra layer of enhancement.
Liquidity: The liquidity funding formula can
vary transaction by transaction depending on
the transactions characteristics as well as the
type of collateral that underlies the transaction.
Structured Investment Vehicles

General: An SIV is a specialized type of
conduit that invests in highly rated securities but has less than full liquidity support
because of the expected liquidation value of
the highly rated securities. SIVs are designed to
be bankruptcy remote, with characteristics of
both structured finance and operating companies. As such, there is an active reliance on the
managers of the SIVs. They generally invest in
a diversified portfolio of highly rated, typically
AAA, longer-term securities that collectively
have a greater yield than the cost of the liabilities they issue. Liabilities typically comprise
CP, MTNs and subordinated capital notes.
Credit: Credit enhancement is typically in
the form of subordinated capital notes. The
required credit enhancement is sized via a
simulation-based capital model or an appropriately vetted capital charge matrix. The model
or the matrix sizes the credit enhancement
considering the period required to liquidate the
underlying portfolio. At all times, the liquidation proceeds plus the credit enhancement
must be sufficient to pay the rated liabilities
issued by the vehicle.
Liquidity: SIVs have an innovative liquidity
structure. In general, their liquidity needs can
be covered by the inherent liquidity in the SIV
structure. The inherent liquidity in the SIV
structure typically includes but is not limited
to available unencumbered cash on hand,
liquidity eligible assets (LEAs)5 and standard
liquidity loan facilities. The manager of an SIV
has some or all of these tools at its disposal
to ensure that the vehicle can meet its cash
outflows (fees, maturing CP and MTNs, as
well as swap payments, if any).
Typically, during the revolving phase, cash
inflows from the underlying securities and any
available inherent liquidity in the SIV structure
must be sufficient to retire maturing liabilities
and all other cash outflows over specific periods
of time. Because the liquidity loan facility is one
component of the inherent liquidity in the SIV
structure, it is typically a fraction of the size that
is required for traditional CP conduits.
3 A third-party enhancer is typically a highly rated guarantor affiliated with the transaction participants or a monoline insurer rated AA or higher.
4 Those explicitly rated transactions that are rated higher than the CP issued from the conduit may not be required to post PWCE.
5 Liquidity eligible assets (LEAs) are eligible assets that are highly liquid.

January 2007
Typical Partially Enhanced Multi-Seller ABCP Conduit Structure
Various
Obligors
Various
Obligors
Various
Obligors
Various
Obligors
Various
Obligors
Seller
Seller
Seller
Seller
Seller
Transaction1
Transaction
Transaction
Transaction
Transaction
Program
Administrator
Fees
Program-Wide Credit
Enhancement (PWCE)
Conduit
Support
Payments
ABCP
Conduit
Administrative
Duties
Fees
Fees
Payments on
Maturing CP
Liquidity
Provider
Payments to Purchase
or Lend Against
Transactions
Liquidity
Payments
Collections
from
Transactions
CP Proceeds
ABCP Investor
1 The transactions that the ABCP conduit acquires represent the special purpose vehicles (SPVs) that the sellers typically set up to facilitate
the conduits acquisition of the transaction.
An uncured breach of any cash outflow coverage Conduit Liabilities

tests will cause a cease issuance of all liabilities, resulting in the defeasance of the SIV and
Commercial Paper
consequently the liquidation of the underlyABCP is generally structured to comply with
ing portfolio. During the defeasance stage, all
Rule 2a-7 of the Investment Company Act of
inherent SIV liquidity and future cash proceeds
1940. It is generally 270-day6 short-term debt
from the liquidation of assets should be sufand issued on a discount or interest-bearing
ficient to retire the liabilities in full and on time
basis. The most common form of conduit
over the liquidation period until the SIV vehicle
issuance is fixed-rate CP, issued at a discount
winds down completely.
with the face value due at maturity.
6 CP issued in the United States typically has a term of no longer than 270 days. In the case of CP extendible programs, the tenor could be as long as 397 days.

January 2007
Discounted CP: The investor purchases discounted CP for a price that is less than the
face amount due at maturity. The interest
is imputed from the difference between the
purchase price and the face value. It cannot
be prepaid by the issuer or redeemed by the
investor prior to maturity.
Conduit Credit Variations
Fully Supported: Fully supported ABCP

conduits are distinguished from partially supported programs because they are 100% credit
enhanced by an appropriately rated entity. For
these conduits, the analysis is not focused on the
underlying collateral, but rather on the party
Interest-Bearing CP: Interest-bearing CP accrues
providing the credit enhancement. The risk to
interest on the amount of the investors purchase
the CP investor is that the credit enhancer itself
price paid for the CP. The investor will collect
becomes insolvent. The documents must dictate
all interest and principal at the maturity of the
that the enhancer will irrevocably and unconCP. It also cannot be prepaid by the issuer or
ditionally pay the liabilities in full and on time.
redeemed by the investor prior to maturity.
The enhancer is often the sponsor or a financial
guarantor.
Extendible Commercial Paper
Extendible CP is characterized by having both an Partially Supported: Partially supported
expected maturity date and a later final maturity
programs are far more prevalent in the ABCP
date. If CP does not roll on the expected
market than fully supported programs. They
maturity date, the program is designed such that
are characterized by having less than 100%
the conduits administrator has the option of
credit enhancement. The analysis for partially
extending the payment on the CP until the legal
supported conduits focuses on the transactions
final maturity date. During the extension period,
within the conduit and on the PWCE available.
the conduit either relies on the cash flows from
the amortization of the assets (e.g., credit cards
Transaction-Level: The transaction analysis
or trade receivables) or the cash flows from the
focuses on the credit quality of the underlysale of the assets (e.g., mortgages) in order to pay
ing collateral, the liquidity-funding formula,
the CP. Although the extension of the CP is very
the transaction-level credit enhancement and
unlikely, DBRS assumes extension and thus rates
the structural and legal protections. Credit
to the legal final maturity date.
enhancement at the transaction level represents
the first-loss protection to the CP investor.7
Medium-Term Notes
MTNs have tenors ranging from 270 days to
Program-Level: The program-level analysis
30 years but are typically issued with maturities
focuses on the size of the PWCE relative to the
ranging from one to ten years. MTNs are rated
overall composition of the conduits portfolio of
with long-term ratings. They can be issued at a
transactions as well as program structural and
fixed rate but are typically floating-rate instrulegal features. PWCE is generally regarded as
ments that make periodic interest payments.
second-loss protection to the CP investors.
They do not qualify as an eligible investment for
money market funds under Rule 2a-7 unless their Conduit Liquidity Variations
maturities are less than one year. They are not
especially common among typical ABCP conduits Full Liquidity: Full-liquidity programs are far
but are issued extensively out of SIV structures.
more prevalent than partial-liquidity programs.
SIVs may use MTNs as a tool to manage liquidity
Full-liquidity programs typically provide 102%
requirements.
liquidity support to the transactions within the
CP conduit. Typically, these facilities will not
fund for defaulted receivables. The surplus 2%
liquidity support is used to mitigate interest rate
risk, but it is not relied on by DBRS. Please see
Is 102% Enough to Cover Interest? on page
17 for more details.
10
7 For the sake of simplicity, this criteria ignores any first-loss tranche created for Fin 46 purposes.

January 2007
Partial/Alternative Liquidity: Partial-liquidity programs have less than 100% liquidity

support. These programs leverage the inherent
liquidity from the underlying assets to pay the
CP. Therefore, the liquidity facilities may not be
necessary or the size may be decreased relative
to traditional facilities depending on the extent
of the inherent liquidity available. For example,
extendible CP programs may have partial or no
liquidity support.
The ABCP market is developing alternatives to

traditional full-liquidity programs. As a testament to this, there is a notable trend toward
establishing SIV and extendible CP conduits.
With changing regulatory rules and Basel II
pending, much of the market is searching for
alternatives to traditional liquidity facilities.
DBRS believes this trend toward partial- or alternative-liquidity structures will continue and is
prepared to analyze innovative alternatives.
Credit Risk
In order to protect the CP investor, conduit
sponsors typically structure their vehicles to employ
credit enhancement on two levels: the transaction-specific level and the program-wide level.
Thus, for the CP investor to actually take a loss,
the asset deterioration must be greater than the
credit enhancement provided on the transaction
level and it must deplete the entire program-wide
credit enhancement that is available across all
transactions.
Internal Assessment: Many transactions acquired

by a conduit do not carry explicit ratings. For these
transactions, DBRS performs a credit evaluation
that is called an internal assessment. These assessments are used by DBRS as part of the analysis
of the CP. An internal assessment is similar to the
analysis of explicitly rated transactions, with some
exceptions. For internally assessed transactions,
DBRS relies on the conduits administrator to
perform an in-depth review of the sellers operations. Further, an internal assessment relies on
transaction-specific
many protections offered by the liquidity facility.
For example, dilution and commingling risks are
credit enhancement
often covered by the liquidity facilities. DBRS,
Transaction-specific credit enhancement is firsttherefore, relies on the rating of the liquidity
loss protection used to absorb any deterioration
provider for many risks in internally assessed transof the collateral on specific transactions within the
actions. Detailed explanations of what the liquidity
conduits portfolio. Each transaction in the conduit
facility typically covers with respect to the above
must be structured and/or credit enhanced so
risks, as well as other risks, can be found in the
that the resulting risk profile of the CP conduit is
Other Risks section beginning on page 17.
commensurate with its CP rating. Common forms
of transaction-specific credit enhancement are
Explicit Ratings: Explicitly rated transactions are
overcollateralization, subordination, excess spread,
analyzed on a stand-alone, or term, basis.8
seller recourse, cash reserves, third-party guaranHowever, the payments from the explicitly rated
tees, structured liquidity and total return swaps.
transaction to the conduit often do not match
Transaction-level credit enhancement is specific to
the payments from the conduit on the CP. Thus,
each transaction and cannot be applied to other
there is a need for traditional liquidity support to
conduit transactions.
mitigate cash flow timing mismatches, as well as
any market disruption risk.
Types of Analysis at the Transaction Level
Transaction Characteristics
In order to rate ABCP, DBRS formulates a credit
opinion on each underlying transaction. At the
Revolving Transactions: A revolving transaction
transaction level, DBRSs analysis can take the form
continually finances its receivables through the
of an internal assessment or an explicit rating.
conduit until the date at which it terminates.
New collateral enters the transaction and pays
down on an ongoing basis. Transactions of this
8 Stand alone, or term, transactions are rated such that the internal cash flows must be adequate to pay periodic interest and ultimate payment of principal
at the legal final date.
11

January 2007
nature can theoretically finance their receivables

indefinitely. The assets in revolving transactions
typically must conform to eligibility criteria that
is reviewed by DBRS.
The historical timing of losses on vintage pools.

Customer concentrations.
The originators risk profile.
Generally, revolving transactions are characterized by having amortization triggers that are
typically checked monthly. These triggers are
generally in place to ensure that the transaction has the proper credit enhancement on an
ongoing monthly (reporting period9) basis. If
breached and left uncured, an amortization of
the transaction will occur. (Please see Revolving
Transactions Sizing Transaction-Level Credit
Enhancement below for more details on the
credit aspects of revolving transactions.) Many
explicitly rated transactions initially revolve and
subsequently, at a predetermined date, amortize.
Amortizing Transactions: An amortizing transaction is characterized by assets that typically
amortize from the transactions inception until
the assets completely wind down. Amortizing
transactions often have a static asset pool.
That is, the asset pool composition is set from
inception. (Please see Amortizing Transactions
Sizing Transaction-Level Credit Enhancement
on page 13 for more details on the credit aspects
of amortizing transactions.) Some explicitly rated
transactions can be classified as amortizing.
Transaction-Level Credit Enhancement

The transaction-level credit enhancement is sized
according to DBRSs rating methodology, which takes
into account both (1) methodologies used to rate a
term, or stand-alone, transaction as well as (2) risks
covered by the liquidity facilities for that particular
transaction. The major factors that are considered
include, but are not limited to, the following:
Eligibility criteria or static pool10 characteristics.
The history of delinquencies.
The historical payment characteristics (e.g.,
seasonality).
12
The quality of the servicer.

Underwriting procedures and policies and recent
changes therein.
The quality of the data.
Idiosyncratic factors specific to the particular
asset type.
Industry/asset-type comparables.
The type of analysis of underlying transactions
will vary based on the asset sector (e.g., mortgages versus auto loans versus trade receivables).
The type of analysis will also vary depending on
whether the transaction is a revolving transaction
or an amortizing transaction.
Revolving Transactions Sizing TransactionLevel Credit Enhancement
Topping up the Reserve in Revolving
Transactions: For revolving transactions, the
proper credit enhancement must be in place
and fully intact at the start of each reporting
period. This is often accomplished via monthly
(reporting period) credit triggers tied to a CP
issuance test.
Generally, the most prevalent monthly credit
trigger in a revolving transaction is known as the
borrowing base test. This test ensures that the
assets and the required credit enhancement are
fully intact on a go-forward basis. Any depletion
of the required credit enhancement resulting from
asset deterioration is typically cured by the seller
in the form of contributing more receivables to the
transaction. This ensures that after each monthly
(reporting period) report, the transactions required
credit enhancement is fully intact. This procedure
of restoring the credit enhancement required each
9 The reporting period is usually conducted on a monthly basis but may be shorter. It represents the frequency of reports on which key asset performance tests
often rely.
10 A static pool is a transaction that is characterized by having a fixed pool of specific assets that amortize from the transactions inception to the point at which
they wind down.

January 2007
month (reporting period) is called topping up

the reserve. If the reserve is not topped up, the
transaction will wind down and amortization
begins.
Ascertaining the Exposure Horizon in
Revolving Transactions: The key to accurately
sizing the transaction-level credit enhancement
requirement focuses on the exposure horizon,
which is the time during which the transactions collateral can experience losses.
Revolving and Amortizing Transactions

Shortening the Exposure Horizon Via
Structural Features: Most revolving or amortizing, non-explicitly rated transactions that are
in a conduits portfolio are sized as per their
exposure horizon. However, there are structural features that may shorten the exposure
horizon. For example, an appropriately rated
takeout provider may promise to purchase a
transaction at a particular time or a transaction may be short-tailed as detailed in the
Short-Tail Exposure summary on page 22.
The sale shortens the exposure horizon for that
transaction.
For revolving transactions, as noted above, the

credit enhancement is typically topped up on a
monthly basis. Therefore, revolving pools in effect
have a fresh start each month (reporting period)
Explicitly Rated Transactions: Explicitly rated
because the credit enhancement is restored to its
transactions can be characterized as either
requisite level. If the credit enhancement is not
revolving or amortizing.
topped up, the conduit is precluded from issuing
CP supported by that transaction. Therefore, the
Explicitly rated revolving transactions typitransaction cannot purchase additional assets,
cally have a set revolving period followed by
thus causing the transaction to amortize.
an amortization period, the end of which is
the legal final date. During the revolving stage,
The maximum time during which the collateral
these transactions typically have amortization
can experience losses, the exposure horizon,
triggers that ensure that the transaction has the
is typically calculated by adding the time it
proper credit enhancement on a go-forward
takes for the assets to naturally amortize to the
basis. These various triggers can be checked
length of the reporting period.
daily, weekly or monthly, depending on the type
of trigger. If breached and left uncured, an early
Amortizing Transactions Sizing Transactionamortization of the transaction will occur. This
Level Credit Enhancement
occurrence, along with greater-than-anticipated
asset deterioration, could lead to the downgrade
Ascertaining the Exposure Horizon in
of the explicitly rated transaction.
Amortizing Transactions: As is the case for
revolving transactions, the key to accurately
Similarly, for explicitly rated amortizing
sizing the transaction-level credit enhancetransactions, among other factors, poor asset
ment requirement for amortizing transactions
performance beyond the expected defaults could
is the exposure horizon, which is the time
lead to a downgrade of the explicitly rated
during which the transactions underlying
transaction. In both cases, the focus for ABCP is
assets can experience losses. Calculating the
the downgrade itself.
exposure horizon for amortizing transactions
is simpler than for revolving transactions.
If the explicitly rated transaction deteriorates
Generally, the exposure horizon is the time it
more than anticipated and a ratings downgrade
takes for the assets to amortize. Hence, the
occurs, a conduits program and/or transacsizing of credit enhancement is based on the
tion documents will set forth a course of action.
amortization period.
Areas addressed by the documents may include,
but are not limited to, the following:
13

January 2007
The action that the rating downgrade will

Borrowing Base Test: The borrowing base test
compel the conduits administrator to perform
(see Revolving Transactions Sizing Transaction(e.g., sell the asset, fund the asset with liquidity).
Level Credit Enhancement on page 12 for details)
ensures that the transaction has the requisite credit
The timing by which the liquidity facility must
enhancement each time the test is calculated. The
fund upon certain events (e.g., a downgrade to a
frequency of its calculation can be monthly, twice a
particular level).
month, weekly or daily.
Any events that can enable the liquidity facility
not to fund the liquidity funding formula (i.e.,
if the rating falls below investment grade).
Performance Triggers: Additionally, many transactions contain performance triggers that address
underperforming collateral. Varying asset types
command different quantitative triggers. Common
The additional credit enhancement that may be
performance tests include excess spread, delinprovided upon a downgrade.
quency and dilution triggers.
In any event, DBRS must be confident that the
documents detail the conduits course of action
and that action sufficiently mitigates the risk to
the CP investor upon downgrade of the transactions rating to a rating level commensurate with
the rating of the CP issued by the conduit.
Seller Triggers: Qualitative seller triggers on the

transaction level include, but are not limited to,
the following:
A seller/servicer insolvency.
A seller/servicer downgrade.
Transaction-Level Triggers
A material decline in the servicers ability to
DBRS typically relies on structural triggers for
perform its duties.
many transactions. These triggers often necessitate
remedies that ensure that the transaction has the
A breach of material representations and
proper credit enhancement on a go-forward basis
warranties.
or, if not, cause an amortization of that transaction. However, while certain triggers are integral to
The cross-default of the seller with respect to
many transactions, such as the borrowing base test
other debt obligations.
for revolving transactions, they are not necessarily required. For example, the sponsor bank may
Conditions Precedent to Issuing CP: The conelect to 100% credit enhance or wrap a particuditions by which CP can be issued are an
lar transaction with a liquidity facility (liquidity
important part of revolving transactions. The
will fund for the principal and interest on the
breach of these conditions will preclude the
CP). In this case, DBRS will rely on the liquidconduit from issuing CP until cured. Thus, they
ity banks rating. The Liquidity Covering Credit
ensure that some key elements on which the
Risks section on page 21 addresses the possible
transactions rating was based are fully intact
varying magnitudes of credit coverage by liquidity
each time the conduit issues CP. For example, the
facilities.
borrowing base test is a key condition precedent
to issuing CP as it ensures that upon each CP
Because some triggers are more vital than others,
issuance, the proper credit reserves are in place.
the remedies for the breach of structural triggers
vary according to their importance. Some triggers Transaction Wind-Down: Uncured breaches of
may not result in a particular transaction winding
transaction-specific triggers may invoke certain
down but rather may invoke another action. For
remedies, including a cease issuance of CP and/or
example, a credit deterioration trigger may invoke
no new purchases of assets. If such a breach is
the trapping of excess spread from the assets to
left uncured, remedies such as this will effectively
bolster the transactions credit enhancement. Some
amortize the transaction.
common triggers are explained below.
14

January 2007
program-wide credit enhancement
The second reason, substantially more complex,

addresses how the growth of a CP conduit affects
Program-wide credit enhancement (PWCE) is a
its risk profile. As the number of transactions
fungible layer of protection generally available to all
increases within the conduit and the conduit grows
transactions within a conduits portfolio. PWCE is
in size, there are factors that counterbalance one
typically drawn after a transactions liquidity facilianother (see Risk Factors, Risk-Mitigating
ties have funded for the good assets (non-defaulted).
Factors and Net Effects below) and thus affect
If, after the liquidity facility funds, a particular
the risk profile of the conduit.
transactions credit enhancement is insufficient to
cover the deterioration of such a transaction,
Risk Factors
PWCE then absorbs the excess loss. Thus, the
transaction-specific credit enhancement acts as a
As the number of transactions within a conduit
first-loss enhancement and the PWCE is typically
increases, the probability that any one or more of
regarded as second-loss enhancement.
those transactions will default also increases. Further,
there is a correlation between the transactions within
DBRS views PWCE as an additional layer of
a conduits portfolio, increasing the likelihood that if
protection much like a subordinated tranche of a
one transaction defaults, so will another. DBRS conCDO. The size of the PWCE relative to the risks
siders the effect of these risk factors when analyzing
inherent within the conduits portfolio of transacthe risk profile of a CP conduit.
tions is vitally important to the overall risk profile
of the conduit.
Risk-Mitigating Factors
PWCE can take many forms but is typically an
LOC, a surety bond, a third-party guarantee, a
credit asset purchase agreement or an irrevocable
loan facility. The entities providing the PWCE
instrument are required to provide an irrevocable commitment, have an appropriate rating
and possess the capability of providing same-day
funding. If same-day funding presents a problem, a
facility with an appropriate short-term rating must
contractually agree to front the necessary funds for
the program enhancer.
PWCE Rationale
PWCE is primarily required for the following
reasons:
First, for transactions that are internally
assessed, DBRS relies on the sponsors review of
each seller and the related assets. This includes
the sponsor banks ongoing reviews of such
seller. PWCE provides protection for the variation, if any, between the banks evaluation of a
seller and what DBRSs opinion is or may have
been had it reviewed the seller.
In contrast, increasing the number of transactions will likely increase the size of the PWCE.
Increasing the size of the PWCE has positive
effects on a conduits risk profile. These positive
effects counter the aforementioned corrosive
factors. First, as the size of the PWCE increases,
the smaller each transaction becomes relative to
the PWCE available to it. Therefore, the probability of any one transaction having a negative impact
on a CP investor is decreased. Thus, as the PWCE
grows with the CP conduit, more transactions will
have to default simultaneously to reach the threshold that would affect the CP investor negatively.
Also, to the extent that the number of transactions
increases the diversity across asset and industry
lines, default correlation among such transactions
decreases the risk to the CP investor.
Net Effects
The overall net effect of the counterbalancing
factors on the conduits risk profile will vary
depending on the composition of the portfolio and
the relative size of the PWCE. Nevertheless, PWCE
is in place to absorb the potential net negative
effects, if any, of increasing the number of transactions within a conduits portfolio.
15

January 2007
Sizing PWCE
As described on the previous page, PWCE is the
fungible layer typically available to all transactions within the conduits portfolio when first-loss
protection has been exhausted. DBRS determines
the minimum amount of PWCE considering the
projected composition of transactions within a
conduits portfolio such that the total risk profile
of the conduit is commensurate with the rating
on the CP.
Excess PWCE
DBRS believes that the size of the PWCE relative
to the composition of the portfolio of transactions
within a CP conduit is a vital factor in assessing the overall risk profile to the CP investor. For
example, the difference between a CP program
that has 5% PWCE and 10% PWCE is material
and should be reflected in the rating of the CP,
all else being equal. For example, if a conduits
portfolio comprised A, AA and AAA transactions and had 5% PWCE, that conduit may
command a rating of R-1 (low). However, if
that conduit had the same portfolio with 10%
PWCE, an R-1 (middle) or R-1 (high) may be
more accurate (depending on the rating level of
the liquidity support). DBRS believes ratings that
more accurately reflect the overall risk profile of a
CP program will provide CP investors with more
information and more transparency.
Remedies for Breach of Key Program Tests: Any

failure to satisfy these tests typically prohibits the
conduit from issuing CP and purchasing additional asset interests, until cured. If left uncured
for a specified period of time (usually a very
short time frame), the cease issuance may become
permanent or a Program Termination Event will
be officially invoked. Either way, the program will
wind down if breach is left uncured.
Minimum PWCE Test

Required PWCE may be reduced if the program
size decreases. Nonetheless, erosion of the PWCE
below a particular level as a result of defaulted
assets may invoke a CP cease-issuance trigger or,
if severe enough, may cause the program to wind
down. If a program wind-down occurs, PWCE
typically is subject to a fixed floor amount to
mitigate the potential for losses resulting from
adverse selection11 from within the conduits portfolio of transactions.
Other General Program-Level

Structural Features
The key material triggers that will wind down a
conduit if left uncured for a short period of time
The program documents cease to be in full force
and effect.
program-level structural features A breach of any material representation or

Key CP Cease Issuance/Asset Purchase Tests
warranty by the conduit as per the program

documents.
Key tests at the program level include, but are not

limited to, the following:
A breach of the minimum net worth covenant

within the program documents.
Program Asset Test: The principal of the nondefaulted assets of all the transactions within
the conduits portfolio should be greater than
or equal to the principal of all of the conduits
liabilities at any time.
Program Liquidity Test: The total available
liquidity commitments must exceed the principal
and interest of all outstanding CP at any time.
16
11 Adverse selection may occur when the conduits portfolio is negatively affected because as shorter-term transactions pay off, the conduit may be left with a
longer-dated, less-diversified portfolio of transactions. Generally, the longer a portfolio of transactions is exposed to losses, the lower the credit quality of
such a portfolio, all else being equal.

January 2007
Other Risks
The following are various other conduit risks and
their respective mitigants. They are present at both
the transaction and program level. Liquidity facilities play a large role in covering many of these risks.
interest rate risk

Interest rate risk arises when the interest collected from the conduits underlying assets may
be insufficient to pay the conduits cost of funds
timely. The transactions in the conduits portfolio
are made up of fixed, floating and non-interestbearing assets. CP interest rates, although typically
fixed for the term of the CP, fluctuate as new CP
is issued. Therefore, the potential for variability
in the conduits transactions as well as in CP rates
over time represents interest rate risk.
the sponsor bank is also the liquidity provider, the

bank does not want to take a loss if liquidity funds
and the reserve is sized improperly. If liquidity is
drawn, cash will be available from the interest
rate reserve to reimburse the liquidity provider. If
liquidity does not fund, which is unlikely, cash is
available from the reserve fund to pay CP.
Additional Safeguards: Other safeguards to the
CP investors include the following:
Typically, the conduit assets are structured to
pay, at a minimum, the conduits cost of funds.
The conduits floating-rate assets are generally
hedged. That is, the conduit will typically swap
out the assets yield and receive the conduits
cost of funds.
Interest Rate Mitigant Transaction-Level

Liquidity Facility: Generally, DBRS relies on the
transaction liquidity banks to fund the interest
accrued at the time of funding and the interest that
will accrue to the maturity of the CP. Thus, the risk
to the CP investor reflects the rating on the transaction liquidity provider. Typically, the sponsor bank
provides the liquidity facility for each transaction.
Additional Interest Rate Mitigant

Transaction-Level
Reserve Account: DBRS typically relies on the
liquidity provider to cover interest rate risk.
However, conduits have incentive to properly
address interest rate risk because in cases where
Rather than rely on the above safeguards, DBRS

typically relies on the liquidity support to cover
interest rate risk on the transaction level.
Interest Rate Mitigants Program-Level

PWCE: Any losses on the transaction level
(namely, a liquidity bank not funding) will be
covered to the extent there is available programwide credit enhancement.
Program Liquidity Tests: DBRS relies on
program-level tests that are designed so that
the liquidity will always be sufficient to pay
the principal and interest on the outstanding
Is 102% Enough to Cover Interest?

Typically, liquidity facilities are sized at 102% of the transaction limit. The extra 2% is designed to cover
the interest component of ABCP. Is this enough? In a high-interest economic cycle and/or CP issued with
longer maturities, interest due on the CP may be more than 2%. Therefore, DBRS does not rely on the
actual size of the liquidity facility, but rather on the program-level liquidity test. This test prohibits the
conduit from issuing any ABCP if, after such issuance, the available liquidity amount cannot cover the
principal and interest on all of the outstanding CP. Therefore, DBRS relies on the program liquidity test
and thus the liquidity facilities to cover interest rate risk. For those few programs that issue floating-rate
CP, a transaction-by-transaction analysis is required to assess interest rate risk.
17

January 2007
CP in full. As described under Key CP Cease

Issuance/Asset Purchase Tests on page 16, there
is a liquidity program test that will prohibit any
CP from being issued if, after considering such
issuance, the available liquidity is less than the
principal and interest on the then outstanding CP. Please see Is 102% Enough to Cover
Interest? on page 17.
foreign exchange risk

Foreign exchange risk arises when a conduit
has assets that pay in a currency other than the
currency in which the CP is issued. If the assets
currency were to weaken relative to the CP
currency, the cash flow from those assets would
lose value and could be insufficient to pay the CP.
Foreign Exchange Mitigants

Transaction-Level
Foreign exchange risk is typically addressed at the
transaction level, although the program documents
will set forth the general approach that will be
taken. There are three primary ways to mitigate
this risk on the transaction level: hedging, liquidity
support and reserve account. For the first two, the
goal of the administrator is to transfer the foreign
exchange risk to an appropriately rated entity. The
third mitigant is a reserve, based on an evaluation
of the foreign exchange risk. The following are
summaries of these common mitigants.
Hedging: A conduits administrator may hedge
foreign currency exchange (FX) risk by entering
into a FX rate swap with an acceptably rated
counterparty. The risk reflects the rating of the
hedge counterparty for payment.
A conduits administrator may hedge FX risk by
matching spot and forward contracts. Matching
the spot and forward contracts will shore up full
payment when the CP matures.
Liquidity Support: Sometimes liquidity will fund
in the currency of the CP and thus liquidity will
take the foreign exchange risk. The risk reflects
the rating of the liquidity bank for payment.
Behind the scenes, and irrelevant to the CP
investor, the liquidity bank will most likely hedge
the risk for its own internal risk management.
18
Reserve Account: The third mitigant is a reserve

account based on the evaluation of the possible
foreign exchange movement between the currencies, the exposure period to such movement
and the environment of the applicable currencys
sovereign location.
Foreign Exchange Mitigant Program-Level

Any losses on the transaction level in excess of the
transaction-specific enhancement will be covered
to the extent there is available program-wide credit
enhancement.
commingling risk
Commingling risk arises in the event that the seller,
acting as the servicer on a transaction, becomes
bankrupt and the collections due to the conduit
are commingled with its general funds. In this situation, the amounts due to the conduit are at risk.
Commingling Mitigant Transaction-Level

Liquidity Facility: Commingling risk is typically
covered by the transactions liquidity facility.
The liquidity funding formula, via document
language, will include funds due from the seller
that have not been received. Typically, liquidity funding formulas only reduce for defaults.
The definition of defaults generally does
not include these funds due from the seller.
Therefore, liquidity banks typically take commingling risk. Thus, the risk to the CP investor
reflects the rating of the liquidity bank.
Additional Commingling Mitigant

Transaction-Level
Lockboxes: Lockboxes are segregated accounts
specifically set up to separate the sellers funds
from those due to the conduit. Setting up
accounts in the name of the conduit is a typical
safeguard used to mitigate commingling risk.
Conduits have incentive to properly address
commingling risk because in cases where the
sponsor bank is also the liquidity provider, the
bank does not want to take a loss if liquidity funds and commingling risk is not properly
addressed. Although DBRS relies on the liquid-

January 2007
ity facility, the use of lockboxes is an additional

safeguard to the CP investor.
Therefore, liquidity will take dilution risk. Thus,

the risk to the CP investor reflects the rating of
the liquidity bank.
Commingling Mitigant Program-Level

Any losses on the transaction level (namely, a liquidity bank not funding) will be covered to the extent
there is available program-wide credit enhancement.
Additional Dilution Mitigant

Transaction-Level
Reserve Account: DBRS typically relies on the

liquidity provider to cover dilution risk. However,
dilution risk
a conduit has an incentive to properly address
dilution risk because in cases where the bank
Primarily relevant in trade receivable and
sponsor is also the liquidity provider, it does not
credit-card transactions, dilutions are non-cash
want to take a loss if liquidity funds and the
adjustments to the receivables. These include,
reserve is sized improperly. If liquidity is drawn,
but are not limited to, discount incentives for
cash will be available from the dilution reserve
early payment to customers, errors in invoice
to reimburse the liquidity provider. If liquidity
amounts and returned goods. Dilutions are a
does not fund, which is unlikely, cash is available
normal recourse item back to the seller. If the seller
from the reserve fund to pay the CP investors. In
becomes bankrupt, these amounts owed to the
rare cases, some transactions may not cover this
conduit by the seller are in jeopardy. When dilurisk via liquidity. In these cases, DBRS would size
tions occur, they reduce the amount of receivables
the reserve at a standard commensurate with the
and thus can leave the conduit short of funds.
internal assessment of the transaction.
Dilution Mitigant Transaction-Level
Dilution Risk Mitigant Program-Level
Liquidity Facility: Similar to commingling risk,

dilution risk is also typically covered by the
conduits liquidity facility. The liquidity funding
formula, via document language, will include
funds due from the seller that have not been
received. Liquidity funding formulas typically only reduce for defaults. The definition of
defaults typically excludes any diluted items.
Any losses on the transaction level (namely, a

liquidity bank not funding) will be covered to
the extent there is available program-wide credit
enhancement.
19

January 2007
Liquidity Risk
general
Liquidity support is vital to an ABCP conduit.
Most CP conduits do not match the maturity
of their assets to the maturity of their liabilities.
Therefore, there may be mismatches between
the cash flow from the assets and the requirements to pay CP in whole and on time. This is the
main reason for liquidity support in U.S. ABCP
programs. In addition, although a market disruption is very unlikely, liquidity is available to pay
CP during such an event.
Liquidity agreements are typically an integral
part of each transaction. They generally fund for
the good assets (non-defaulted) before PWCE is
drawn. PWCE is designed to cover the defaults
in excess of the transactions first-loss credit
enhancement.
Liquidity support is typically a facility provided by
liquidity banks, predominantly sponsor banks, that
support transactions within the ABCP program.
They are typically sized up to 102% of the transaction. Liquidity risk is one of the primary areas of
focus when analyzing ABCP transactions.
forms of liquidity agreements
Liquidity Loan Agreement: A Liquidity Loan

Agreement (LLA) differs from a LAPA in that
the provider agrees to lend to the conduit in the
amount of the funding formula. The conduit
must pay the liquidity bank back for this loan.
Any outstanding liquidity loans should be
properly counted as a liability of the conduit
for both the program asset test and the program
liquidity test.
Other Liquidity Facilities: Total return swaps
and repurchase agreements are examples of
other forms of liquidity facilities that can
support transactions within a CP conduit. The
counterparties providing these facilities must be
appropriately rated or internally assessed to a
standard commensurate with the risk profile of
the CP conduit.
same-day funding
Liquidity facilities are required to fund on a
same-day basis and thus must have an adequate
short-term rating. (See the Rating Requirements
for Liquidity Support section on page 21.) Sameday funding mitigates any timing mismatches and
market disruption risk.
liquidity funding formula
Liquidity support can take many forms and is typically provided on the transaction level for ABCP
The liquidity funding formula describes the
programs. The following are common forms:
amount that a liquidity provider will fund when
asked to do so. Typically, liquidity funding
Liquidity Asset Purchase Agreement: The
formulas exclude defaulted assets. This formula is
most prevalent form of liquidity facility is the
analyzed by DBRS to understand how the funding
Liquidity Asset Purchase Agreement (LAPA).
formula works in concert with the required credit
LAPA banks purchase the entire asset interest
enhancement for that particular transaction.
and thus take the transaction out of the conduit
and onto its own balance sheet. The LAPA
There are three prevalent types of funding
bank will fund for the funding formula, which
formulas: asset-based, capital-based and liquidis reviewed by DBRS for inclusion of the transity-event. The first two are commonly used in
action into the conduit. Assuming the credit
internally assessed transactions; the last is often
is sized properly, the funding formula will be
used in explicitly rated transactions.
adequate to retire CP in whole and on time.
This is because the liquidity funding formulas
Asset-Based Liquidity Funding Formula: Assettypically cover everything but defaults. If credit
based formulas typically provide for the funding
enhancement is adequate to cover defaults, then
of the good (non-defaulted) asset balance.
the amount the LAPA bank funds should be
Defaults are usually accumulated from the last
ample.
20

January 2007
good borrowing base test. The initial balance as

of each good borrowing base test report includes
the requisite reserves appropriate to the rating
level commensurate with the CP issued.
Capital-Based Liquidity Funding Formula:
Capital-based formulas typically provide for the
funding of the capital that is equivalent to the
principal and the interest on the CP minus the
defaults that are in excess of the credit enhancement required for that specific transaction.
Liquidity-Event Liquidity Funding Formula:
Liquidity-event formulas are commonly used
with explicitly rated transactions. Such formulas
typically provide for the funding of the principal and interest on the CP. However, they are
sometimes appropriately referred to as liquidity cliff formulas because, if an explicitly rated
security or related third-party enhancers rating
migrates downward to a particular level, the
liquidity facility may no longer be obligated
to fund. Thus, the likelihood of such migration occurring within a specific time period is
the key risk. Please refer to Explicitly Rated
Transactions on page 13, which explains
some of the more common considerations from
DBRSs perspective.
rating requirements
for liquidity support
Liquidity Rating Requirements for R-1 (low) CP
Programs: DBRS requires that for R-1 (low) ABCP
programs, liquidity support is R-1 (low) or higher.
Liquidity Rating Requirements for R-1 (middle)
CP Programs: DBRS requires that for R-1
(middle) ABCP programs, liquidity support is R-1
(middle) or higher. On an exception basis, R-1
(low)/A (middle) banks may support R-1 (middle)
programs under certain conditions. DBRS will
require special structural features that will limit
the risk of downward migration of the rating of
the bank. Such features may include downgrade
triggers resulting in a replacement of the bank or
a draw on liquidity within a specified time period
acceptable to DBRS.
Liquidity Rating Requirements for R-1 (high) CP
Programs: DBRS generally requires that for R-1
(high) ABCP programs, liquidity support is R-1

(middle) or higher. A downward rating migration
of an R-1 (middle) liquidity provider will necessitate further assessment and an action from the
administrator and/or the affected liquidity bank
acceptable to DBRS.
liquidity covering other risks

In many transactions, particularly non-explicitly
rated transactions, external-liquidity support
covers more than market disruption risk and
timing mismatches. These risks are detailed in the
Other Risks section beginning on page 21.
liquidity covering credit risks

In addition to covering market disruptions, timing
mismatches and other risks, liquidity is sometimes used to cover credit risks. The degrees to
which liquidity will cover credit risk can vary.
In some instances, the liquidity facility may elect
to cover some of the credit risk, as detailed in
Short-Tail Exposure highlight on the following
page. In other instances, liquidity will cover the
entire credit risk by wrapping the transaction. In
this case, liquidity will fund for the principal and
interest on the outstanding CP under all circumstances except for the acceptable Exceptions to
Liquidity Funding listed below.
exceptions to liquidity funding

Liquidity facilities are committed and obligated to
fund upon request except under remote circumstances. Generally, the acceptable exceptions to
liquidity funding are as follows:
The bankruptcy of the conduit.
A highly rated third partys insolvency. Typically,
the AAA monoline insurer that is a party to the
transaction.
A rapid downward migration of a security to
non-investment-grade status. Given the changing
regulatory environment for an increasing number
of conduits, liquidity may only support investment-grade assets. There are varying ways via
credit enhancement and/or structural features
to cover the risk of liquidity not funding the
21

January 2007
transactions that are less than investment grade. Other exceptional circumstances acceptable to
DBRS requires that such a transaction be credit
DBRS that will not negatively affect the rating of
enhanced or structured to an acceptable standard
the CP issued from the conduit.
such that the risk profile of the conduit is commensurate with its CP rating.
Short-Tail Exposure
Whether transactions are revolving or amortizing, the exposure horizon is the maximum time the
collateral pool can be subject to losses. However, the exposure horizon can be shortened by the use of
liquidity facilities. This is explained and illustrated below.
A transactions structural features may shorten the time period during which the underlying assets are
subject to losses. This is referred to as short-tailing the exposure horizon. A common way to short-tail
the exposure horizon is via a funding mechanism within the Liquidity Asset Purchase Agreement (LAPA).
For example, if a revolving transaction* were to amortize in five months and had a monthly reporting
period (borrowing base test) then the exposure horizon would be 180 days (equal to the underlying
assets amortization plus the reporting period). If, however, the CP tenor were limited to 30 days and
had a liquidity funding mechanism tied to a monthly borrowing base test, then the exposure would be
shortened to approximately two months. This is so because upon a borrowing base breach, CP could no
longer be issued and liquidity would be invoked. The example below illustrates this concept.
Structural Features of Short-Tail Example
Without the following structural features, the exposure to losses on this collateral pool would have been
180 days.
CP tenor will be limited to 30 days.
A borrowing base breach will invoke a cease-issuance trigger on the CP.
Liquidity will fund the CP (excluding defaults) upon maturity.
Worst Case Scenario Timeline
DAY 1
Good
borrowing
base test
DAY 2
Borrowing
base test
fails but is
not reported
DAY 30
Issue
30-day
CP
DAY 31
Borrowing
base test
fails and is
reported
DAY 32
Cant issue CP
DAY 60
CP is due
and funded
by liquidity
Exposure to losses is from day 2 to day 60.

The exposure to losses on the transaction in this example has been reduced from 180 days to approximately 60 days because of the short-tail feature. It is important to note that there are various ways to
short-tail exposure. The above example is among the more common ways used.
* Assuming that the tenor of the CP can be up to 150 days or more.
22

January 2007
Rating Process and Documentation Review

rating process initiation
The initial review of a new conduit usually begins
with a proposal phase. The proposal phase is
useful in order to uncover any unusual or complex
issues with respect to any credit, liquidity, legal
or operational risks. Thereafter, documentation is
prepared and DBRS conducts its initial operational
review of the prospective sponsor bank.
conduit rating program analysis

After the proposal phase, the administrator,
typically the sponsor bank, delivers the program
documents. These are the documents to which the
administrator of a conduit must adhere. DBRS
analyzes these documents in order to issue a rating
on the CP program. Typical program documents
conduit confirmations
transaction analysis
After reviewing the conduit program documents,
DBRS will review the operative documents for each
transaction that the conduit acquires. Specifically,
DBRS will analyze the documents that govern each
level of asset transfer as well as the liquidity agreement and any other documents that are salient to
the transaction rating. Upon the satisfactory completion of the document review together with the credit
analysis of the transaction, a formal credit committee
is conducted. If the credit committee votes to agree
with the proposed rating, a rating letter will be issued.
The rating letter will confirm that the addition of the
transaction to the conduits portfolio will not change
the current rating of the CP issued by the conduit.
Asset Transfer Agreement/Receivable

Purchase Agreement
Administration Agreement.
The conduits corporate documents.
Management Agreement.
Depositary or Issuing and Paying Agency
Agreement.
The document that governs the transfer of asset

interests from the seller (or special-purpose vehicle
(SPV)) to the conduit will be reviewed. Key factors
analyzed include, but are not limited to, the
following:
Transaction-level conditions precedent to issuing
CP (e.g., borrowing base test).
Placement Agency Agreement.

Eligible receivables.
Any insurance or LOC agreement.
Credit enhancement.
Security Agreement.
Key definitions.
Definitions (summary of terms).
Legal aspects of the transaction.
Investment Policy.
23

January 2007
Liquidity Agreement
The liquidity funding formula.
The other essential document on the transaction level

is the liquidity agreement, which can take many forms.
Total return swaps and repurchase agreements provided
by appropriately rated counterparties are examples of
acceptable liquidity facilities. However, the most prevalent forms of liquidity agreements are the Liquidity
Loan Agreement (LLA) and the Liquidity Asset
Purchase Agreement (LAPA). Key factors analyzed
Circumstances by which liquidity is not obligated to fund.

Timing of payment in order to retire the CP timely.
The other risks covered by the liquidity provider
(see the Other Risks section on page 17).
Legal aspects of the document.
Circumstances by which the liquidity bank will

fund.
Surveillance
monthly review
Required and actual program-wide credit
DBRS monitors each conduit on a monthly basis,
enhancement.
based on reports submitted by the respective conduit
administrators. The key elements of the monthly
Liquidity bank commitments and ratings.
report are designed to identify any weaknesses within
a conduits portfolio in order to ascertain whether
Any changes to support facilities.
any rating action is required. These elements include,
but are not limited to, the following:
The ratings on support counterparties, if
applicable.
Each transactions name and rating.
Portfolio performance as related to deal-specific
Conduit liabilities outstanding.
amortization triggers.
Seller concentrations.
Portfolio mix, including concentrations.
Required and actual transaction-specific credit
enhancement.
24
Conduit performance as related to program

amortization triggers.
annual review
Annual operational reviews, along with monthly
surveillance, are essential to support the ongoing
rating of the ABCP conduit.
Copyright 2007, DBRS Limited, DBRS, Inc. and DBRS (Europe) Limited (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is
obtained by DBRS from sources believed by DBRS to be accurate and reliable. DBRS does not perform any audit and does not independently verify the accuracy of the information
provided to it. DBRS ratings, reports and any other information provided by DBRS are provided as is and without warranty of any kind. DBRS hereby disclaims any representation or
warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, tness for any particular purpose or non-infringement of any of such information. In no
event shall DBRS or its directors, ofcers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay,
interruption in service, error or omission or for any resulting damages or (2) for any direct, indirect, incidental, special, compensatory or consequential damages with respect to any
error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representatives in connection with or related to obtaining,
collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any information. Ratings and other opinions issued by DBRS are, and must be construed solely
as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell or hold any securities. DBRS receives compensation, ranging from
US$1,000 to US$750,000 (or the applicable currency equivalent) from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings. This publication may
not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS.
www.dbrs.com
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toronto

Asset-Backed Commercial Paper

DBRS is a full-service credit rating agency

U.S. ABCP Conduits Credit and Liquidity January 2007

Asset-Backed Commercial Paper Criteria Report:

Primary Risks of ABCP

DBRS Short-Term Rating

Commercial Paper Fundamentals

Basic Mechanics of ABCP Structures

ABCP Conduit Revolving Phase

ABCP Conduit Wind-Down Phase

Conduit Credit Variations

Conduit Liquidity Variations

Types of Analysis at the Transaction Level

Transaction-Level Credit Enhancement

Program-Wide Credit Enhancement

Program-Level Structural Features

Key CP Cease Issuance/Asset Purchase Tests

Minimum PWCE Test

Other General Program-Level Structural Features

U.S. ABCP Conduits Credit and Liquidity

Interest Rate Mitigant Transaction-Level

Additional Interest Rate Mitigant Transaction-Level

Interest Rate Mitigants Program-Level

Foreign Exchange Risk

Foreign Exchange Mitigants Transaction-Level

Foreign Exchange Mitigant Program-Level

Additional Commingling Mitigant Transaction-Level

Commingling Mitigant Program-Level

Additional Dilution Mitigant Transaction-Level

Dilution Risk Mitigant Program-Level

Forms of Liquidity Agreements

Liquidity Funding Formula

Rating Requirements for Liquidity Support

Liquidity Covering Other Risks

Liquidity Covering Credit Risks

Exceptions to Liquidity Funding

Rating Process and Documentation Review

Rating Process Initiation

Conduit Rating Program Analysis

Conduit Confirmations Transaction Analysis

Asset Transfer Agreement/Receivable Purchase Agreement

U.S. ABCP Conduits Credit and Liquidity

The DBRS U.S. Asset-Backed

dbrs short-term rating

U.S. asset-backed commercial paper (ABCP) is a

With more short-term rating gradations than other

Short-Term Ratings Scales Comparison

All ratings below R-3

All ratings below A-3

All ratings below P-3

All ratings below F3

U.S. ABCP Conduits Credit and Liquidity

Commercial Paper Fundamentals

basic mechanics of abcp structures

and Conduit Fees: Although interest is typically

ABCP Conduit Wind-Down Phase

program sponsors may choose to wind down a CP

conduit wind-down may occur if the conduit

Interest-Bearing Assets: For transactions that