In the context of the MMG, rating override means rating upgrade or rating downgrade. Overrides are permitted; however, they should follow a rigorously documented process. This process should include a clear governance mirroring the credit approval process based on obligor type and exposure materiality. The decision to override should be controlled by limits expressed in terms of number of notches and number of times a rating can be overridden. Eligibility criteria and the causes for override should be clearly documented. Causes may include, amongst others: (i) events specific to an obligor, (ii) systemic events in a given industry or region, and/or (iii) changes of a variable that is not included in the model.
2.10.2
Rating overrides should be monitored and be included in the model validation process. The validator should estimate the frequency of overrides and the number of notches between the modelled rating and the new rating. A convenient approach to monitor overrides is to produce an override matrix.
2.10.3
In some circumstances, the rating of a foreign obligor should not be better than the rating of its country of incorporation. Such override decision should be justified and documented.
2.10.4
A contractual guarantee of a parent company can potentially result in the rating enhancement of an obligor, but conditions apply:
(i)
The treatment of parental support for a rating enhancement should be recognised only based on the production of an independent legal opinion confirming the enforceability of the guarantee upon default. The rating enhancement should only apply to the specific facility benefiting from the guarantee. The process for rating enhancement should be clearly documented. For the avoidance of doubt, a sole letter of intent from the parent company should not be considered as a guarantee for enforceability purpose. A formal legal guarantee is the only acceptable documentation.
(ii)
For modelling purpose, an eligible parent guarantee can be reflected in the PD or the LGD of the facility benefiting from this guarantee. If the rating of the facility is enhanced, then the guarantee will logically be reflected in the PD parameter. If the rating of the obligor is not enhanced but the guarantee is deed eligible, then the guarantee can be reflected in the LGD parameter. The rationale behind such choice should be fully documented.