Introduction
This report describes KBRA’s rating methodology used to assess counterparty risk in structured finance transactions. KBRA defines structured finance counterparty risk as the risk that KBRA’s rating on a transaction’s securities may be affected by a change in a structured finance transaction counterparty’s credit profile.
Several types of counterparties are utilized in structured finance transactions, including derivative counterparties, credit and liquidity support providers, transaction service providers, account banks, and issuers of permitted investments. The risks that counterparties may pose to a transaction can be financial or operational in nature and can range from minor to significant. The more material the counterparty’s performance is to the credit quality of the transaction, the more likely the ratings of the transaction’s securities will be dependent upon (and limited by) KBRA’s assessment of the counterparty’s creditworthiness. In determining creditworthiness,…