The rating actions are as follows:

Class A (ISIN ES0305154009), EUR 1,448.1m: assigned new rating (P)AA_SF
Class B (ISIN ES0305154017), EUR 301.9m: assigned new rating (P)B_SF

The ratings reflect the legal and financial structure of the transaction; the quality of the underlying collateral, given macroeconomic conditions in Spain; the ability of the servicer and originator, Banco de Sabadell (NR); the counterparty credit risk exposure to Sabadell as the account bank and paying agent; and the management competence of Intermoney Titulización SGFT SA.

 Rating rationale  

The rating on the class A notes is driven by the 22.0% credit enhancement available in the structure, which strongly protects against credit losses from the assets. Scope expects credit enhancement to increase fast thanks to the strictly sequential amortisation of the structure in combination with a fast-amortising portfolio. The portfolio’s short total weighted average life of 3.7 years under 0% prepayments and the positive short-term outlook on the Spanish economy support Scope's expectation of a good performance for the collateral pool.

The class B notes are exposed to mid-term uncertainty around Spanish fundamental economic imbalances. The class B notes are only protected by excess spread and overcollateralisation from a 4.75% cash reserve. Excess spread is available to provision for the notes’ principal shortfalls, and amounts to 1.98% p.a. as of closing.

The credit quality of the notes also reflects the bar-belled characteristics of the static asset portfolio, which comprises 65.9% of unsecured loans with shorter maturities (weighted average life of 2.4 years), and 34.1% of mortgages with longer maturities (weighted average life of 7.2 years). Scope has modelled default rates of 5.0% for unsecured loans and 10.0% for mortgages. The analysis considers a cure rate of 10% for the unsecured segment and 0% for mortgages because data received for the mortgage segment did not allow to analyse cure patterns. Historical asset performance has been volatile and this is reflected in the very high default-rate coefficients of variation derived from vintage data: 84.7% for unsecured loans and 95.3% for mortgages.

Scope derived the key quantitative assumptions from vintage data provided by Sabadell. The data depicts the performance of Sabadell’s entire SME loan book in the years from 1997 to 2015, a period during which Spain experienced both benign and distressed economic conditions. In addition, Scope incorporated information from benchmark transactions in Spain.The analysis also incorporates the long-term performance of the Spanish SME loan market observed over a full economic cycle from 1993 to 2014. The long-term adjusted segment default rates are 5.4% for unsecured loans and 9.8% for mortgages. The volatility observed in the market data was lower than the volatility in Sabadell’s vintage data; the respective segments’ coefficients of variation are 80% for unsecured loans and 56% for mortgages.

Scope expects high recovery rates for mortgage loans, even after accounting for the value corrections of Spanish real estate assets. Scope has modelled base case recovery rates of 27.0% for unsecured loans and 77.9% for mortgages. Mortgages are secured by commercial and residential properties, and have low loan-to-value ratios (currently 48.7% – not indexed). Scope derived the recovery rate for unsecured loans from Sabadell’s vintage data from 1997 to 2015; loan-specific recovery rates for mortgages reflect Scope’s market-value-decline assumptions for properties in Spain. The blended portfolio recovery rates under AA and B rating stresses are 38.9% and 52.9% respectively.

The exposure of the class A notes to Sabadell does not limit the maximum rating achievable by this transaction. Scope has performed and will regularly update an internal credit estimate on Sabadell. The analysis has accounted for the counterparty exposure in the context of the structural protection features – mainly risk substitution covenants upon loss of BBB- rating or equivalent credit quality.

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 (6.8 years) and the still-present fundamental imbalances of Spanish economy.

Experienced SME lender (positive). Scope regards the operational involvement of Banco Sabadell as positive for this transaction because it is an experienced SME lender in Spain with a good performance track record as supported by the information provided the bank.

 Short risk exposure (positive).  Class A notes represent a relatively short risk exposure to counterparties and possible macroeconomic deterioration. The expected weighted average life of class A notes under 0% prepayments is 2.2 years.

 High recovery rate (positiv e). Low loan-to-values on mortg ages (weighted average of 48.7%) drive the high expected portfolio recovery rate of 52.9%, as estimated by Scope.

Excess spread (positive). Excess spread available from the asset portfolio (1.98% p.a. as of closing) is 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 liquidity support and portfolio loss provisioning at transaction liquidation.

High default volatility risk (negative). Delinquency vintage data presented to Scope showed significant levels of volatility which increase the probability of high default rate scenarios under stress. Scope modelled a portfolio coefficient of variation of 90.1%. High volatility partly offsets the relatively low portfolio default rate – 6.7%, derived from vintage data.

Unhedged interest rate risk (negative). The transaction is exposed to interest rate risk because 37% of the assets – mostly unsecured loans – pay a fixed-rate coupon, whereas the notes receive variable interest. This risk is not mitigated in the structure and results in excess spread compression under rising interest rate scenarios.

Long default definition (negative). The long default definition of the structure (i.e. 12 months) hinders the ability to capture excess spread during the first year after closing – except for loans subjectively classified as defaulted by the originator.

Counterparty concentration (negative). Sabadell performs all counterparty roles in this transaction, including account bank and paying agent. However, this is mitigated by Sabadell’s credit quality as assessed by Scope, the short life of the class A notes, and the automatic replacement should its credit quality fall below that of a bank rated BBB-.

Rating sensitivity

Scope tested the resilience of the rating against deviations of main input parameters: mean default rate, 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 declines to A- if the mean default-rate assumption is increased by 50%; the rating declines to A if the base case recovery-rate assumption is decreased by 50%. The class B rating declines to CCC if the mean default-rate assumption is increased by 50% or if the base case recovery-rate assumption is decreased by 50%.

The rating for the class A and the class B decline by one notch if interest rates are increased to 8% over the first six years of the transaction.

Methodology

The methodology applicable for this preliminary rating is the ‘SME ABS Rating Methodology’ and the ‘Rating Methodology for Counterparty Risk in Structured Finance Transactions’. 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, 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.
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
Draft offering circular and transaction-related contracts; management due diligence presentation provided by the originator; delinquency and recovery vintage data; loan-by-loan preliminary portfolio information, portfolio audit report, 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 “SME ABS Rating Methodology”, dated June 2016 and 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
© 2016 Scope Corporation AG and all its subsidiaries including Scope Ratings AG, Scope Analysis, Scope Investor Services GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings AG at Lennéstraße 5 D-10785 Berlin.

Rating issued by
Scope Ratings AG, Lennéstraße 5, 10785 Berlin.