Rating agencies

Rating agencies can unlock access to capital sources you otherwise couldn’t reach, particularly insurance companies and certain bank investors. A rated deal typically prices tighter than an unrated equivalent. But ratings come with significant cost, timeline, and ongoing obligations.

This topic covers when you actually need ratings, how to select agencies, what the process entails, and how to work with agencies effectively.

Role of rating agencies in ABF

What ratings accomplish

A credit rating from S&P, Moody’s, Fitch, KBRA, or DBRS provides third-party assessment of credit risk for your securities. For investors, this means:

Standardized credit scale: An AAA-rated tranche from your consumer loan securitization is analytically comparable to an AAA-rated tranche from an auto ABS deal
Regulatory capital efficiency: Banks and insurance companies receive favorable capital treatment for rated securities (Basel RWA for banks, NAIC designations for insurers)
Independent analysis: Investors can rely on agency stress testing rather than building their own cash flow models
Liquidity: Rated securities trade more easily in secondary markets

For you as an originator, ratings can reduce your cost of capital by 25-75 basis points compared to unrated equivalents, depending on the tranche and investor base. More importantly, ratings unlock access to insurance capital, which represents one of the largest and most price-competitive investor pools in structured finance.

What ratings don’t tell investors

Ratings assess the probability of full and timely payment under stressed scenarios calibrated to each rating level. They don’t assess:

Relative value: Two AAA-rated securities can have very different spreads; the rating doesn’t tell you which is cheap
Operational quality: A well-run originator and a struggling one can produce identically-rated tranches if the structure provides sufficient credit enhancement
Liquidity risk: Ratings measure credit risk, not how easily you can sell the security
Your equity economics: The rating is about noteholder protection, not your residual cash flow

When ratings add value

Not every ABF transaction needs ratings. Consider the cost-benefit:

Situation	Rating Recommendation
Accessing insurance capital	Required
Public ABS issuance	Required
Term securitization with bank/fund investors who require ratings	Required
Private placement to credit funds	Usually not required
Warehouse facility	Not required
Forward flow or whole loan sale	Not required

If your capital sources don’t require ratings, you’re paying $150K-500K+ in upfront fees plus $25K-75K annually in surveillance for minimal benefit. Many originators operate entirely in the unrated private market until scale and economics justify the transition to rated issuance.

The major rating agencies

Five agencies dominate ABF ratings. Each has different methodologies, asset class strengths, and market positioning.

S&P global ratings

The largest ABS ratings franchise with comprehensive coverage across asset classes. S&P publishes detailed methodology documents for each asset type, making their analytical approach transparent.

Strengths: Broad investor acceptance, deep auto and consumer loan expertise, strong analytical bench depth.

Approach: Known for detailed loan-level analysis and generally conservative stress assumptions.

Moody’s investors service

Strong presence in CLOs, RMBS, and auto ABS. Moody’s methodology differs from S&P in several ways, so the same collateral pool can receive different ratings from each agency.

Strengths: Dominant in CLO ratings, sophisticated modeling infrastructure, extensive RMBS experience.

Approach: Emphasizes loss-given-default and recovery analysis; tends to focus heavily on originator/servicer assessment.

Fitch ratings

Solid ABS coverage with particular strength in RMBS, autos, and credit cards. Often slightly more conservative than S&P on certain consumer asset classes.

Strengths: Strong RMBS franchise, good European coverage, detailed surveillance.

Approach: Heavy emphasis on performance triggers and structural protections.

KBRA (Kroll bond rating agency)

Newer agency with growing presence, particularly in esoteric and emerging asset classes. Often more receptive to novel collateral types that legacy agencies may approach cautiously.

Strengths: Willingness to rate non-traditional asset classes, responsive analyst teams, competitive on timelines.

Approach: Tends to be more pragmatic about limited performance history; emphasizes originator quality.

DBRS morningstar

Strong Canadian presence and growing US franchise. Competitive on certain structures, particularly when issuers want a second rating at a reasonable cost.

Strengths: Canadian market dominance, competitive pricing, good real estate and infrastructure coverage.

Approach: Solid methodology but smaller analytical teams in some asset classes.

Which agencies do investors require?

The answer depends on your investor base:

Insurance companies: Typically require two ratings for NAIC designation purposes. S&P + Moody’s is the gold standard, but S&P + Fitch or S&P + KBRA increasingly accepted.
Bank investors: Often accept a single rating from S&P or Moody’s for internal risk-weighted asset calculations.
Credit funds: Usually don’t require ratings at all; they do their own analysis.

Note: Before engaging rating agencies, confirm with your underwriter or placement agent which agencies your target investors actually require. Getting the wrong combination wastes money.

Pre-engagement vs. formal engagement

Pre-engagement discussions

Before you commit capital to the formal rating process, you can have preliminary discussions with agencies. These conversations help you understand:

Whether the agency will rate your asset class
General methodology concerns for your collateral
Likely rating range for your proposed structure
Timeline and fee expectations

Pre-engagement is typically free or involves a modest fee ($10K-25K). You’ll provide summary information, not full loan tapes or complete data rooms.

What to prepare for pre-engagement:

Executive summary of your origination business
Proposed transaction structure and capital stack
Summary collateral statistics (average balance, FICO/score distribution, geographic concentration, WAC, WAL)
2-3 years of static pool performance data (or whatever history you have)
Key risk factors and mitigants

The agency will provide feedback on credit enhancement levels, structural features they’d require, and any methodological obstacles. This is your opportunity to identify deal-killers before you’ve spent significant legal and structuring costs.

When pre-engagement matters most

Pre-engagement is most valuable when:

You’re rating an asset class for the first time
You’re using an agency for the first time
Your collateral has unusual characteristics
Your performance track record is limited

For a repeat issuer with the same agency, same asset class, and consistent collateral, pre-engagement may be unnecessary. You know the methodology, and the agency knows your portfolio.

Formal engagement

Formal engagement means signing an engagement letter, paying an upfront fee (or committing to pay at closing), and beginning the full analytical process. Once you formally engage:

You owe the fee: Even if you don’t close the deal, most engagement letters require payment of a significant portion of the fee
The process is public: Your transaction will eventually have a published presale report and rating announcement
Timeline pressure begins: Rating committee scheduling requires coordination with your closing timeline

Don’t formally engage until you have high confidence the deal will close. Paying $150K+ for a rating on a deal that falls apart is an expensive lesson.

The rating process

Timeline

A typical rating process runs 4-8 weeks from formal engagement to rating publication:

Phase	Duration	Activities
Data submission	Week 1	Full loan tape, historical performance, servicing policies, legal docs
Initial analysis	Weeks 2-3	Agency runs cash flow models, reviews collateral, identifies questions
Q&A / clarification	Weeks 3-4	Back-and-forth on data issues, methodology points, structural questions
Management presentation	Week 4-5	You present to the rating team (and sometimes rating committee)
Rating committee	Week 5-6	Internal agency decision
Presale / publication	Weeks 6-8	Presale report drafted, reviewed, published; ratings announced

Complex deals (novel asset classes, large transactions, multiple tranches) take longer. First-time issuers should budget 8-12 weeks.

Information requirements

Agencies will request comprehensive data. Expect to provide:

Collateral data:

Full loan tape with all underwriting fields
Data dictionary explaining each field
3-5 years of static pool performance (or maximum available history)
Roll rate and delinquency transition matrices
Loss severity analysis
Prepayment data by vintage

Operational information:

Origination policies and underwriting guidelines
Credit decisioning process and exception tracking
Servicing policies (collections, modifications, charge-off timing)
Quality control and audit procedures
Key personnel and organizational structure

Financial information:

Audited financial statements (2-3 years)
Liquidity position and funding sources
Contingent liabilities and litigation

Legal and structural:

Draft transaction documents
SPV structure and bankruptcy remoteness analysis
True sale and perfection opinions (or draft forms)

Management presentation

You’ll present to the rating team and potentially the rating committee. This is not a pitch meeting; it’s a credit assessment. The agency is evaluating:

Your business: How do you originate? What’s your competitive advantage? Why do borrowers choose you?
Credit discipline: How do you maintain underwriting standards under growth pressure?
Operational resilience: What happens if key people leave? How do you handle servicing stress?
Data integrity: Can you substantiate the performance data you’ve provided?

Come prepared for detailed questions. Agencies will challenge optimistic assumptions. If your loss rate has been 3% and you’re projecting 2.5%, expect to defend that projection.

Important: Don’t oversell. Agencies are professional skeptics. Unsubstantiated claims damage your credibility. If you don’t know an answer, say so and follow up.

Rating committee

The rating committee is the agency’s internal decision-making body. Your analyst presents the credit analysis; the committee votes on the rating. You won’t be in the room for this.

Factors that influence committee decisions:

Analytical work performed by your coverage team
Peer comparison to other issuers in the asset class
Structural protections relative to historical performance
Originator/servicer assessment

If the committee has concerns, your analyst may come back with additional questions before finalizing.

Preliminary vs. final rating

The preliminary rating (sometimes called “expected rating”) is the rating the agency anticipates assigning, subject to review of final documentation. This is what appears in the presale report.

The final rating is assigned at or shortly after closing, once the agency confirms:

Final documents match the structure analyzed
Collateral composition meets eligibility criteria
All conditions precedent are satisfied

In most cases, preliminary and final ratings match. Discrepancies occur when final documents materially differ from draft or closing collateral diverges from the analyzed pool.

Rating agency fees

New issue fees

Upfront rating fees depend on deal size, complexity, and asset class:

Deal Size	Typical Fee Range (per agency)
Under $200M	$100K-175K
$200M-500M	$150K-250K
$500M-1B	$200K-350K
Over $1B	$300K-500K+

Illustrative pricing. See pricing disclaimer.

Fee drivers include:

Asset class novelty: Well-established asset classes (auto, credit card) cost less than esoteric collateral
Number of tranches: More tranches means more analysis
Structural complexity: Master trusts, prefunding, revolving periods add work
Timeline: Rush jobs may incur premium fees

Surveillance fees

Once rated, you pay annual surveillance fees to maintain the rating:

Deal Size	Annual Surveillance
Under $200M	$25K-40K
$200M-500M	$35K-55K
Over $500M	$50K-75K+

Surveillance fees are typically paid from the waterfall, senior to noteholders. Budget for these in your deal economics.

One rating vs. two

Many investors (particularly insurance companies) require two ratings. The cost isn’t quite double:

First agency: Full fee ($150K-300K)
Second agency: Often 10-20% discount on standard fees

Budget 1.5x-1.8x for dual ratings. The incremental cost is worth it if you’re targeting insurance capital, which often represents the tightest pricing in the market.

How fees get paid

Upfront fees: Usually paid from closing proceeds, structured as a closing cost or deducted from initial advance
Surveillance fees: Paid from the waterfall, typically senior to all note payments

Some issuers pay rating fees directly rather than from deal proceeds, particularly for smaller deals where the fee represents a larger percentage of proceeds.

Fee negotiation

Rating agency fees are more negotiable than agencies suggest, particularly for:

Repeat issuers: If you issue quarterly, you have leverage
Programmatic shelves: Agreeing to rate multiple deals can reduce per-deal fees
Competitive situations: If you’re genuinely considering a different agency, fees may flex

For first-time issuers on a single deal, expect limited flexibility.

Working effectively with rating agencies

Prepare thoroughly

The single biggest driver of rating process delays is incomplete data submission. Agencies can’t run models without loan tapes. They can’t assess originator quality without financials. Missing information creates back-and-forth that extends your timeline.

Before you submit:

Verify loan tape completeness and accuracy
Ensure performance data matches the tape
Have servicing policies documented and current
Prepare clear answers to likely methodology questions

Know the methodology

Each agency publishes its rating criteria. Read them. For consumer ABS, S&P’s methodology document explains:

How they calculate base case default assumptions
What multiples they apply for each rating stress level
How they treat seasoning, geographic concentration, and borrower credit
What structural features they require for different ratings

Understanding the methodology lets you anticipate questions and structure your deal to optimize ratings.

Present your credit story

Agencies rate the originator as much as the collateral. A strong originator with experienced management, sound controls, and stable funding can achieve better ratings than a weaker platform with similar collateral.

Your presentation should cover:

Why your business exists and why borrowers choose you
How your underwriting has evolved and why
What happens when performance deteriorates
How you maintain quality under growth pressure
Your path to profitability (if not yet profitable)

Respond quickly

Rating committee schedules are tight. If your analyst requests additional data or clarification, respond within 24-48 hours. Slow responses can bump your deal from a committee date, adding weeks to your timeline.

Designate one person internally as the rating agency point of contact. Scattered responses from multiple team members create confusion.

Build the relationship

For programmatic issuers, your rating agency relationship matters. A consistent analyst who knows your business can expedite repeat transactions. They understand your performance history, know your team, and can advocate internally.

Maintain contact between deals. Provide quarterly performance updates even when you’re not in the market. When performance shifts, call your analyst before they see it in the tape.

Ongoing surveillance

What surveillance covers

After closing, agencies monitor your deal throughout its life:

Performance review: Monthly or quarterly analysis of collateral performance against expectations
Covenant compliance: Verification that triggers and covenants are being tested properly
Structural integrity: Confirmation that waterfall payments are correct
Rating affirmation or action: Periodic confirmation that current ratings remain appropriate

Reporting requirements

Each agency specifies reporting requirements in the engagement letter. Typical requirements:

Report	Frequency	Contents
Servicer report	Monthly	Payment activity, delinquency, losses, prepayments
Collateral tape	Monthly/Quarterly	Loan-level data updated for performance
Compliance certificate	Quarterly	Trigger and covenant status
Audited financials	Annual	Originator financial condition

Meet deadlines. Late reports trigger questions and potentially negative surveillance commentary.

Performance triggers

Agencies set performance expectations when they rate your deal. If actual performance materially deviates:

Positive variance: Performance better than expected; may lead to upgrade consideration
Negative variance: Performance worse than expected; triggers enhanced surveillance

Material deterioration can lead to:

Outlook change: Rating outlook moves to negative, signaling potential future action
Watch list: Rating placed on watch for possible downgrade within 90 days
Downgrade: Rating lowered to reflect increased credit risk

Managing surveillance

Proactive communication is essential. If you see performance deteriorating:

Call your analyst before they see it in the data
Explain what’s happening and why
Describe what you’re doing about it
Provide context (seasonal patterns, macro factors, one-time issues)

Agencies respond better to issuers who surface problems proactively than to those who wait to be asked.

Rating agency differences by asset class

Agency expertise and appetite vary significantly by asset class.

Auto loans and leases

The most established ABS asset class. All five agencies rate auto, with S&P and Moody’s dominating. Methodologies are mature and predictable. If your auto portfolio has reasonable credit characteristics, the rating process is relatively straightforward.

Consumer unsecured

S&P and Moody’s have strong consumer unsecured practices. KBRA has been receptive to fintech and marketplace lenders that may not fit legacy agency frameworks. Expect more scrutiny on borrower credit quality and underwriting consistency than in prime auto.

Equipment finance

Fewer rated deals means less benchmarking data. S&P and KBRA both rate equipment ABS, but expect more questions about asset heterogeneity and residual value assumptions than in consumer lending.

Esoteric asset classes

For non-traditional collateral (music royalties, litigation finance, data center revenues), agency appetite varies dramatically:

KBRA: Generally most receptive to novel asset types
Fitch and DBRS: Selectively engaged in certain esoterics
S&P and Moody’s: Typically more cautious on first-of-kind structures

If you’re bringing a novel asset class, start with pre-engagement calls to gauge appetite before committing to any agency.

Marketplace and fintech originated

These deals receive heightened originator scrutiny given limited operating history and potential rapid growth. Agencies focus heavily on:

Underwriting consistency during scale-up
Unit economics and path to profitability
Management team experience
Servicing capability under stress

KBRA has rated more fintech ABS than legacy agencies, making them often the first call for emerging originators.

When you need (or don’t need) ratings

Ratings required

Public ABS issuance: SEC-registered offerings require ratings for investor base and distribution
Insurance capital placement: NAIC designation requires ratings; this is the primary reason most term ABS gets rated
Certain bank investors: Some banks’ internal policies require ratings for RWA treatment
Rated note feeders: If you’re feeding rated paper to insurance or bank portfolios, you need ratings

Ratings not required

Warehouse facilities: Banks provide warehouse financing without ratings; they do their own credit analysis
Private placements to credit funds: Most credit funds (Ares, Apollo, Blackstone, etc.) don’t require ratings
Forward flows and whole loan sales: Buyers analyze collateral directly
Back-leverage facilities: Repo and NAV facilities typically don’t require ratings on the underlying

The insurance question

If you want insurance company participation in your term securitization, you almost certainly need ratings. Insurance represents one of the largest pools of ABF capital and often prices tighter than alternatives. The cost-benefit calculation:

Costs:

Upfront fees: $150K-500K (one or two agencies)
Annual surveillance: $25K-75K
Timeline: Add 4-8 weeks to closing
Ongoing reporting obligations

Benefits:

Access to insurance capital (often $50M+ per investor)
Spread tightening: 25-75 bps vs. unrated private placement
Secondary market liquidity
Marketing credibility for future deals

For a $300M term deal, 50 bps of spread improvement saves $1.5M annually. Rating costs pay back quickly.

Building toward rated issuance

Many originators follow a progression:

Early stage: Unrated warehouse facility from a credit fund
Growth: Larger warehouse from bank, still unrated
Scale: First rated term securitization to access insurance capital
Mature: Programmatic rated issuance with established agency relationships

Don’t rush to rated issuance. Build performance track record, refine your data infrastructure, and grow your portfolio to a size where rating economics make sense (typically $200M+ deal size).

Worked example: rating cost-benefit analysis

Scenario: You’re an equipment finance originator with a $350M portfolio considering a term securitization. Your options:

Option A: Unrated private placement to credit funds

Pricing: SOFR + 250 bps on senior, SOFR + 650 bps on mezz
Blended cost: approximately SOFR + 340 bps
Rating costs: $0
Timeline: 8-10 weeks

Option B: Dual-rated term ABS targeting insurance and banks

Pricing: SOFR + 175 bps on AAA, SOFR + 350 bps on BBB, unrated residual
Blended cost: approximately SOFR + 260 bps
Rating costs: $400K upfront + $65K annual surveillance
Timeline: 12-16 weeks

Analysis:

Spread savings: 80 bps = $2.8M annually on $350M
Rating costs: $400K year 1, $65K ongoing
Net benefit year 1: $2.4M
Net benefit year 2+: $2.7M+

For this deal size, ratings clearly pay for themselves. The break-even deal size is around $100-150M, below which the rating cost consumes too much of the spread savings.

Key takeaways

Ratings unlock insurance capital (the primary benefit) and can reduce your cost of capital by 25-75 bps, but add $150K-500K in upfront costs plus ongoing surveillance.
Use pre-engagement before committing to formal engagement. Understand methodology concerns and likely ratings before you’ve spent significant capital.
Prepare thoroughly. Incomplete data submissions are the #1 cause of timeline delays.
Know which agencies your investors require. Getting S&P + KBRA when your insurance investors want S&P + Moody’s wastes money and time.
Build the relationship. Programmatic issuers benefit from consistent analyst coverage and proactive communication.
Not every deal needs ratings. Warehouse facilities, private placements, and whole loan sales typically don’t require them. Match your capital structure to your capital sources.