Stefan Bund, group md and head of asset-based finance at Scope Ratings, answers SCI's questions

Q: How and when did Scope Ratings become involved in the securitisation market?
A: Scope Ratings was established in 2002 as a funds analysis house, specialising in the commercial real estate, SME and infrastructure sectors. The company expanded into the credit rating business in 2012 by merging with a smaller German rating agency.

Scope's move was triggered by increasing demand from investors and politicians alike for a European alternative to the North American-dominated rating agency landscape. A fact that has also been reflected in recent credit rating agency regulation, which require structured finance instruments to have two credit ratings, one of which should be from a smaller rating agency with less than 10% market share.

Scope has three analytical lines: financial institutions; corporates; and asset-based finance. The latter encompasses our legacy funds unit, as well as the project finance and structured finance segments. All lines are run by very experienced analysts from the industry: Sam Theodore, who spent more than 17 years at Moody's, runs FI; Britta Holt, who spent more than 14 years at Fitch and S&P, runs European mid-caps; and Guillaume Jolivet, who worked 10 years at Moody's structured finance team, leads SF.

I was inspired by the idea of establishing a new approach to rating agencies - one that takes an entirely European perspective and offers a sustainable alternative for investors and issuers alike.

Q: What are your key areas of focus today?
A: Scope already rates more than 55% of ECB-eligible bank debt in Europe, as well as corporates in France, Germany, the Netherlands, Spain and the UK. In the context of structured finance, we're currently working with French, German, Spanish and UK arrangers on potential CLO, CMBS and SME transactions. The timing for these deals is for later this year, and our ratings may ultimately be private or public.

With regards to our ratings, we concluded that an expected loss rating contains more information for investors, and this is why our ratings address expected loss - both the likelihood of default and how much an investor is likely to lose. While quantitative modelling is the linchpin of the analysis of asset securitisation and structured finance instruments, Scope believes that the analysis of qualitative factors also plays a crucial role in assigning a rating. Our methodology therefore emphasises qualitative credit judgment based on objective criteria, e.g. as derived from Scope's framework for rating asset management quality.

Key to our analysis are the assumptions that flow into our models. We want to rate deals in a European context, and not just apply the stresses on asset performance that arise from the North American experience. Our approach takes historic performance into account: benign or deteriorating environments are subject to stresses themselves and are directly reflected in the strength of an asset class' performance.

Q: How do you differentiate yourself from your competitors?
A: Together with our emphasis on a European perspective, we differentiate ourselves through our expertise. People are our most important investment, and we have built a team of experienced, highly qualified analysts. This is an ongoing process: at present, for example, we are looking for senior analysts in asset-based finance.

Based on their deep understanding of a deal and the associated asset class, our analysts are encouraged to engage in dialogue with investors and arrangers on a level playing field. We're open to investors challenging our model and ensuring that it makes sense from a credit perspective.

At the same time, Scope is different from other smaller rating agencies in that it has a 12-year track record in the funds industry, a brand name in Germany and dedicated experience in each of the asset classes we cover. We're the only Germany-based rating agency with a dedicated European outreach.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: Our immediate objective is to position Scope as a European first choice among smaller rating agencies; and in the long term we will also compete with the larger North American rating agencies. The focus is to build on existing relationships, while actively talking to other market participants. To this end, we have a dedicated business development team that is systematically approaching new investors and arrangers.

Nevertheless, one challenge for us is the lack of coordination between European policymakers. On one hand, the authorities are promoting competition among rating agencies in order to reduce investor dependency on the North American model. But on the other hand, other institutions like the ECB insist that ratings on bonds used for repo purposes should be from the large North American rating agencies.

We are working on changing this situation, but the barriers to entry remain high. An obvious fix to this lack of coordination appears unlikely, but we are sure that consensus will emerge in time.

Q: What major developments do you need/expect from the market in the future?
A: We're seeing a trend towards finding alternatives to the pure structured finance route. For example, an increasing number of SME transactions are being structured in a fund format rather than as a securitisation. These structures typically don't have tranched liabilities - they're a single tranche of notes, with investors essentially taking the first loss.

Another development we're seeing is the requirement by some real money investors for credit ratings on their investments, as a response to Solvency 2, for instance. One way of achieving this is to repackage the funds into SPVs, which issue notes that can then be rated.

There are different formats for different regulatory reasons and the transactions are typically private, but currently a lot of commercial real estate holdings are being repackaged in this way. Such activity plays into the strengths of Scope, given its historical background in funds and commercial real estate.

CS