Scope assigned preliminary ratings to the notes issued by BBVA-10 PYME, FT as follows:

Serie A (ISIN ES0305110001), EUR 596.70m: assigned new rating (P) AA–_SF
Serie B (ISIN ES0305110019), EUR 183.30m: assigned new rating (P) B+_SF

The ratings reflect the legal and financial structure of the transaction; the quality of the underlying collateral in the context of the Spanish macroeconomic environment; the capability of Banco Bilbao Vizcaya Argentaria SA (BBVA, A/S-1/Stable Outlook) as the servicer; the counterparty risk exposure to BBVA as the account bank, paying agent and liquidity provider; and the management ability of Europea de Titulización SGFT SA.

RATING RATIONALE

The rating on the class A notes is driven by the credit enhancement available in the structure, which provides strong loss protection. The rating of class A benefits from a sequential note amortisation and exposure to a fast-amortising portfolio. The class B rating reflects the tranche’s larger exposure to uncertainties in the Spanish economy beyond Scope’s outlook, and limited credit protection from a 5% cash reserve. The two rated tranches benefit from excess spread, which is available to provision for the notes’ principal shortfalls, and accumulates to 1.71% as of closing.

The rating on the notes is also driven by the credit characteristics of the portfolio comprising 48.9% of shorter-maturity unsecured loans and 51.1% of mortgages with longer maturities. Given the relatively short weighted average life of 3.7 years under 0% prepayments, the short-term outlook on the Spanish economy reflects positively on Scope’s expected performance for the collateral pool.

Scope derived the key quantitative assumptions from vintage data provided by BBVA, covering a period from 2007 to 2014 and reflecting the performance of its entire loan book. This period captures significant economic stress in Spain. Forward-looking lifetime default rates of 12.3% and 22.1% were modelled for the unsecured-loan and mortgage segments of the portfolio, respectively. Credit risk from the portfolio is also driven by the high volatility of historical default rates detectable in both portfolio segments. This is reflected in the relatively high default-rate coefficients of variation derived from vintage data of 56.0% and 63.3% for unsecured loans and mortgages, respectively.

Scope’s recovery estimate accounts for the bar-belled nature of the portfolio. Considering a 20.0% cure rate for both segments, the base case recovery rates are 21.3% and 66.7% for unsecured loans and mortgages, respectively. Mortgages are secured by commercial and residential properties, and have low loan-to-value ratios (currently 54%). Scope derived the recovery rate for unsecured loans from vintage data, whereas loan-by-loan recovery rates for mortgages were calculated using Scope’s assumptions of market value declines in Spain.

KEY RATING DRIVERS

Spanish economy (positive). The Spanish economy continues to improve. This recovery will benefit class A notes in the short term, while the impact on class B notes is less certain due to its longer weighted average life and the fragile recovery in Spain.

Stressed performance references (positive). Scope calibrated portfolio assumptions based on 2007-2014 vintage data, a period of high stress for Spanish SMEs. Scope also considered a long-term economic cycle adjustment to limit the procyclicality for the class A rating.

Substantial lifetime default rate (negative). The long weighted average remaining term of seven years for the portfolio results in the relatively high lifetime ‘90 days past due’ default rate of 17.3%, based on the provided vintage data.

High default volatility risk (negative). Delinquency vintage data presented to Scope showed significant levels of volatility. The portfolio-segment-weighted coefficient of variation is 60.8%.

High recovery rate (positive). Low loan-to-value mortgages (weighted average of 54%) drive the high portfolio recovery rate of 50.9% as estimated by Scope, considering a cure rate of 20% for both portfolio segments.

Short lifetime exposure (positive). Class A notes bear a short risk exposure to counterparties and possible macroeconomic deterioration because its expected weighted average life is 2.2 years under a 0% conditional prepayment rate, driven by the mainly French amortisation profile of the unsecured-loan and mortgage exposures in the portfolio.

Counterparty concentration (negative). Counterparty risk to BBVA is mitigated by the short expected life of the class A; BBVA’s credit quality as reflected in Scope’s rating; and adequate structural-protection features, including BBVA’s automatic replacement as account bank and paying agent, upon losing a BBB rating.

Moderate excess spread (positive). Excess spread available from the asset portfolio is 1.71% as of closing, available to cover periodic shortfalls in the transaction.

Simple and transparent structure (positive). The deal features a swapless, strictly-sequential, two-tranche structure with a combined priority of payments and a cash reserve available for default provisioning.

RATING SENSITIVITY

Scope tested the resilience of the rating against deviations of main input parameters: mean default rate, default-rate coefficient of variation, recovery rate and interest rates. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The class A rating is one and two notches lower if the base case default-rate assumption increases by 25% and 50% respectively; one and three notches lower, respectively, if the base case recovery rate reduces by 25% and 50%. The mean default rate increasing by 25%, combined with recovery rate assumptions reducing by 25%, lowers the rating by three notches. A 50% increase in the coefficient of variation also reduces the rating by two notches.

Increasing the mean default rate by 25% and 50% respectively results in a class B rating that is two and three notches lower; reducing the base case recovery rate by 25% and 50% respectively lowers it by two and three notches. A combined adverse shift of 25% of both the mean default rate and recovery rate lowers the class B rating by three notches. The class B rating depends less on tail events, and is only one notch lower, if the coefficient of variation increases by 50%.

The ratings for the class A and class B are both one notch lower if interest rates increase to 8% over the next six years.

METHODOLOGY

The methodology applicable for this preliminary rating is ‘SME CLO Rating Methodology’, dated May 2015. Scope also applied the principles contained in the ‘Rating Methodology for Counterparty Risk in Structured Finance Transactions’, dated August 2015. Both files are available on www.scoperatings.com.

Scope analysts are available to discuss all the details of the rating analysis and the risks, which this transaction is exposed to.

REGULATORY AND LEGAL DISCLOSURES

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.

The rating analysis has been prepared by Sebastian Dietzsch, Lead Analyst. Dr. Stefan Bund, Committee Chair, is the analyst responsible for approving the rating.

Rating history
The rating concerns newly-issued financial instruments, which were evaluated for the first time by Scope Ratings AG.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the issuer of the investment, represented by the management company.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it.

Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating
Offering circular and transaction-related contracts; operational review visit with the originator; delinquency and recovery vintage data; loan-by-loan preliminary portfolio information.
Scope Ratings considers the quality of the available information on the evaluated entity to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodology applicable for this rating is “SME CLO Rating Methodology”, dated May 2015. Scope also applied the principles contained in the “Rating Methodology for Counterparty Risk in Structured Finance Transactions”, dated August 2015. Both files are available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

Conditions of use / exclusion of liability
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