The rating actions are as follows:

Serie A (ISIN ES0305155006), EUR 612.5m: assigned new rating AAA_SF
Serie B (ISIN ES0305155014), EUR 87.5m: assigned new rating BB_SF

The ratings reflect the legal and financial structure of the transaction; the quality of the underlying collateral in the context of both the current and long-term macroeconomic conditions in Spain; the ability of the originator and servicer, Banco Bilbao Vizcaya Argentaria SA (BBVA, A/S-1/Stable Outlook); the counterparty credit risk exposure to BBVA as account bank and paying agent; and the management ability of Europea de Titulización SGFT SA.

Rating rationale

Serie A notes are protected against potential losses from a revolving portfolio of auto loans by 17.0% of credit enhancement from overcollateralisation, further supported by significant excess spread. The notes benefit from the strictly sequential amortisation in combination with a fast-amortising portfolio after a revolving period of 1.5 years.

Serie B notes are primarily exposed to potential market value losses which could arise as a result of the exercise of the clean-up call by BBVA. Scope’s analysis incorporates the contribution to expected loss from a sale of the portfolio of assets under a stressed refinancing spread environment. Serie B notes are also exposed to uncertainties around the Spanish economic outlook because of their longer life and lower credit enhancement from a cash reserve (i.e. 4.5%). Serie B notes strongly benefit from the high excess spread available, which can be used to provision for principal shortfalls and amounts to a gross 6.14% p.a. as of closing after accounting for stressed senior costs of 1%.

Scope considers the initial portfolio of auto loans to be of good quality, with 64% of loans granted to finance the purchase of new vehicles. The portfolio is highly granular and will amortise fast (weighted average life is 2.9 years). However, the revolving nature results in an extended exposure to auto loans (total expected weighted average life of 4.6 years) under 0% prepayments. The still short exposure reflects positively on Scope’s expected credit performance of the portfolio, which benefits from the positive short-term outlook on the Spanish economy.

Scope’s analysis captures the higher risk from the revolving nature of the portfolio. Scope modelled a static portfolio which incorporates the portfolio migration it believes could be possible after the replenishment period. Scope has considered an increased share of used-vehicle loans of 40%, an extended lifetime of the contracts, lower seasoning and the maximum level of delinquent assets as allowed by the transaction covenants. In addition, a reduced portfolio interest rate of 4% was considered to account for excess-spread reduction from average rate compression.

Scope’s modelling assumptions reflect the period of significant economic stress in Spain covered by the vintage data provided by BBVA (i.e. 2008 to 2015). Scope has modelled forward-looking lifetime default rates of 8.4% and 9.2% for new- and used-vehicle loans, respectively; and cure rates of 20% and 15%, also respectively, to address the ‘540 days past due’ default definition used in this transaction. Scope expects low volatility of delinquency rates, which reflects positively on the credit risk of the portfolio (low coefficients of variation of 27.6% for new-vehicle loans and 40.6% for used-vehicle loans were also modelled).

Scope has modelled portfolio average recovery rates of 27% and 38% for the analysis of Serie A and Serie B notes, respectively. Recovery assumptions were also derived from recovery vintage data covering the stressed period from 2008 to 2015.

Key rating drivers

Significant excess spread (positive). Very high excess spread to cover periodic losses from the assets represents strong credit protection for the notes (spread between weighted average rate from assets and weighted average cost of liabilities is 6.14% as of closing).

Improving Spanish economy (positive). The Spanish economy continues to improve, which benefits the Serie A notes in the short term. The impact on the Serie B notes is less certain due to the longer life, exposing these to the structural imbalances of Spanish economy.

Conservative performance assumptions (positive). Scope calibrated portfolio assumptions based on vintage data from 2008-2015, a period of high stress for Spanish consumers. Scope adjusted for the long-term economic cycle to prevent procyclicality and avoid overshooting on the protection buffer needed to support Serie A.

Moderate default volatility risk (positive). Delinquency vintage data showed only moderate levels of volatility, with a segment-weighted coefficient of variation of 33%. Scope assumed stressed long-term volatility for Serie A (43%).

Short life (positive). Serie A notes bear a short risk exposure to counterparties and possible macroeconomic deterioration (weighted average life of 3.3 years under 0% prepayments, including the revolving period).

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

Revolving portfolio (negative). The portfolio will replenish quarterly over 1.5 years after the closing date. The characteristics and the credit quality profile of the portfolio can migrate during this period. This risk is mitigated in the structure by adequate single-asset, portfolio and performance covenants.

Substantial lifetime default rate (negative). The long portfolio life results in a relatively high point-in-time portfolio default rate of 8.7%, based on BBVA’s vintage data (long-term adjusted default rate of 5.9%). The analysis considers a portfolio cure rate of 18% to account for the ‘540 days past due’ default definition in the transaction.

Market risk from clean-up call (negative). The terms of the clean-up call option result in market value risk for the Serie B notes. This risk is partially mitigated by the incentives of BBVA in this transaction, but still increases the expected loss for Serie B investors.

Counterparty concentration and exposure (negative). BBVA performs all counterparty roles in this transaction. Counterparty risk from financial exposure is mitigated by both BBVA’s high credit quality and the automatic replacement mechanism in the structure should its Issuer Credit Strength Rating fall below BBB.

Long default definition (negative). The transaction’s default definition of 18 months prevents the structure from trapping excess spread over the first 1.5 years of the life of the transaction. The transaction is nonetheless able to trap significant excess spread.

Unsecured recoveries (negative). Recoveries are only supported by full recourse over the obligors. Scope has given credit to the strong recovery track record of the servicer and derived its recovery assumptions from vintage data (base case recovery rates of 44% for new-vehicle loans and 47% for used-vehicle loans).

Rating-change drivers

Faster-than-expected portfolio amortisation may positively impact the ratings if credit enhancement builds up before credit losses crystallise.

Better-than-expected performance of the assets could positively impact the ratings.

Worse-than-expected performance of the assets could negatively impact the ratings.

Rating sensitivity

Scope tested the resilience of the rating against deviations of main input parameters: mean default rate and recovery rate. 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.

Serie A notes’ rating is not sensitive to either i) a 50% increase in default rates or ii) a 50% decrease in recovery rates. Serie B notes’ rating would decline to B if the default rates were increased by 50%; and to B+, if recovery rates are decreased by 50%.

Methodology

The methodology applicable for these final ratings is the ‘General Structured Finance Rating Methodology’, dated August 2015. Scope also applied the principles contained in the ‘Auto ABS Rating Methodology – Call for comments’, dated June 2016 and the ‘Rating Methodology for Counterparty Risk in Structured Finance Transactions’, dated August 2015. All 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, Dr Sven Janssen.
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. 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
ES0305155006; 14.07.2016; new; (P) AAA_SF
ES0305155014; 14.07.2016; new; (P) BB_SF

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; portfolio audit report and legal opinions.
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. Scope also applied the principles contained in the “Auto ABS Rating Methodology – Call for comments”, dated June 2016 and the “Rating Methodology for Counterparty Risk in Structured Finance Transactions”, dated August 2015. All 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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