Scope Ratings has assigned definitive ratings to the notes issued by IM Grupo Banco Popular MBS 3, Fondo de Titulización as follows:

Serie A (ISIN ES0305109003), EUR 702m: assigned new rating A+_SF
Serie B (ISIN ES0305109011), EUR 198m: assigned new rating B-_SF

IM GBP MBS 3, FT is a granular, true-sale securitisation of a EUR 900m portfolio of non-conforming, first-lien, mortgage-secured loans granted by Grupo Banco Popular (Banco Popular Español SA and its fully owned subsidiary, Banco Popular Pastor SA) to Spanish individuals and resident/non-resident foreigners, primarily to finance the purchase of residential properties in Spain.

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 the servicers, Banco Popular and Banco Pastor; counterparty risk arising from exposure to Banco Popular as the account bank and paying agent; and the management capability of Intermoney Titulización SGFT SA.

RATING RATIONALE

The class A rating is primarily driven by the limited structural protection against the counterparty credit risk exposure to Banco Popular. Transaction documents also allow the account bank to have a relatively low minimum credit quality of BB (or equivalent private credit assessment by Scope).

The 25% credit enhancement provided by the structure is more than sufficient to support the class A rating and protect the notes against losses from a portfolio of mortgages considered by Scope as high-risk assets. The securitised mortgages are ‘non-conforming’ due to the very high, original loan-to-value (LTV) ratios (between 85-130%); an expected high probability of default; and/or aggressive terms and conditions such as very long maturities. Additionally, 3.5% of the portfolio is backed by commercial properties.

Scope’s outlook on the Spanish economy reflects positively on the transaction. However, significant and fundamental economic imbalances in Spain increase uncertainties over the long run, which may particularly threaten the class B notes due to its very long expected weighted average life of 28.7 years.

The ratings also reflect available excess spread and the possible impact of negative carry due to interest reset risk and stressed servicing costs. The class B notes are more exposed to these risks due to their long lives, but are ultimately supported by a 3% credit enhancement from cash in the liquidity reserve.

Scope has accounted for the high asset-default risk by assuming an average ‘lifetime 90-day default’ rate of 21.9%, a default-rate coefficient of variation of 48%, and a cure rate of 30%. Scope also accounted for recovery risk resulting from a high weighted average LTV of 101.6%, and modelled a base case recovery rate of 53.2% for portfolio defaults not cured after 360 days. High LTVs reflect the market-price correction of domestic residential properties as well as the aggressive origination approach. The weighted average original LTV is 109%.

Banco Popular has limited servicer flexibility because of the already stretched terms and conditions of the mortgages in this portfolio (i.e. high LTVs, foreigner exposures, low interest rate margins, constant annuity amortisations, and long times to maturity). Furthermore, Banco Popular has adhered to Spain’s code of good banking practice (law 1/2013), which limits the ability of the servicer to enforce security rights over mortgaged collateral, and Scope thus expects long recovery lags after default (the analysis models a lag of four years).

KEY RATING DRIVERS

Significant credit enhancement (positive). The loss-absorbing protection provided by the structure is high. Credit enhancement for the senior notes in this transaction is 25%.

Simple structure protects liquidity (positive). The structure provides strong liquidity protection to ensure the timely payment of interest, and features a dedicated cash reserve of 3% of the notes’ balance, which cannot be depleted by defaults, in addition to a combined priority of payments. The structure is a plain-vanilla, swapless, strictly-sequential, two-tranche structure.

Availablity of internal default probabilities (positive). Scope calibrated the portfolio-modelling default-rate assumptions with internal obligor-default probabilities provided by Banco Popular, which enable credit discrimination between the assets and have allowed Scope to overcome limits posed by the vintage data available for the analysis.

Improving Spanish economy (positive). The Spanish economy is improving slowly, yet threatened by political uncertainty. This positive impact is, however, less certain for class B notes due to the fragility of the recovery and still-significant fundamental imbalances.

Naturally hedged interest risk (positive). Almost all loans are referenced to 12-month Euribor or similar floating-rate indices. All notes’ reference 3-month Euribor, and margin reset dates are uniformly distributed in the year. Euribor rates are highly correlated, and temporary negative carry is covered by excess spread.

Counterparty risk (negative). The class A are limited to the A rating category because of the excessive commingling-risk exposure to the account bank, which can not be replaced unless its rating falls below BB (or equivalent private credit assessment by Scope).

High LTVs (negative). The weighted average LTV of the portfolio is 101.6%, which has a negative effect on possible recovery proceeds. Scope has calculated loan-specific, fundamental recovery rates that factor in high LTVs.

Long maturity (negative). The portfolio will amortise slowly, making the transaction more vulnerable to future economic downturns. The weighted average remaining time to maturity is 29.2 years. Scope’s default-rate modelling captures this risk via a higher mean and volatility.

Substantial foreign obligors exposure (negative). Mortgages to foreigners represent 19.1% of the portfolio. This represents a negative selection bias in this portfolio as this segment exhibits a higher default risk. Scope has stressed the mean default rate of the portfolio to account for this risk.

Outdated property appraisals (negative). 19.2% of mortgages in the portfolio were last appraised between 6 months and up to 12 years before it was originated. Scope has applied region-specific indexation curves, which reflect haircuts, to estimate the present values of properties.

RATING STABILITY AND BREAK-EVEN ANALYSIS

Scope has tested the sensitivity of the model results to the main input parameters: mean default rate; default-rate coefficient of variation and recovery rate. Sensitivity stresses should not be considered indicative of expected or likely scenarios.

The rating of the class A is not sensitive to deviations from the base case modelling assumptions because counterparty risk limits the maximum rating possible for this transaction. In particular, the rating is not sensitive to 25% shift of the default rate, 25% haircut to the base case recovery rate, a coupled 25% increase of the default rate with a 25% haircut to the recovery rate, or to a 25% increase of the default-rate coefficient of variation.

The class B ratings would only lose a maximum of one notch after sensitivity stresses.

The break-even analysis also shows the robustness of the class A rating. The break-even 90 dpd default rate for the class A notes in the portfolio is 50.2% under a 31.3% recovery assumption or 38.5% under zero recoveries.

NOTES

A detailed rating report is freely available on www.scoperatings.com.

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 Martin Hartmann, Analyst.
Responsible for approving the rating: Guillaume Jolivet, Managing Director.

Rating history
The rating concerns an issuer which was evaluated for the first time by Scope Ratings AG. Scope had already performed a preliminary rating for the same rated instrument in accordance with Regulation (EC) No 1060/2009 on rating agencies, as amended by Regulations (EU) No 513/2011 and (EU) No 462/2013.

Instrument ISIN; Date; Rating action; Rating
ES0305109003; 4.12.2015; new; (P) A+_SF
ES0305109011; 4.12.2015; new; (P) B-_SF

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a mandate of the issuer of the investment as represented by IM Grupo Banco Popular MBS 3, Fondo de Titulización.

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 contracts; operational review presentations; delinquency and recovery vintage data; loan-by-loan portfolio information; legal opinion.

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 ‘General Structured Finance Rating Methodology’, dated August 2015. The credit committee 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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