Scope Ratings has taken the following rating actions on the notes issued by IM SABADELL PYME 10, FT:

Series A (ISIN: ES0305154009), EUR 970.6m: affirm at AA+_SF
Series B (ISIN: ES0305154017), EUR 301.9m: upgrade to BB+_SF, from B+_SF

Rating rationale

Today’s rating actions were taken to address an error. Scope identified an error, which might have had an impact on the intitial rating, in the application of the reserve fund available to the transaction, which was treated as amortising rather than non-amortising over the transaction’s life. As a consequence, moneys available to the transaction were not recognised in the agency’s cash flow analysis. Scope also identified an input error related to the rating action on 4 August 2017, leading to collected principal and interest available to cover portfolio defaults and interest due not being considered in the analysis. The corrections, combined with latest available performance on the transaction, resulted in today’s rating actions.

The rating actions also reflect the increased credit enhancement for the Series A notes, driven by amortisation, to 30.3% from 22.0% at closing, and for the Series B notes, to 6.5% from 4.75% at closing. The solid collateral performance also supports the ratings.

Assets classified as over 90 days past due currently comprise just 0.65% of the portfolio. The structure deleverages quickly via prepayments, at 11.8% per annum (all data as of 31 May 2017). The benign macroeconomic environment in Spain, which Scope expects to continue in the short to medium term, also reflects positively on the expected performance of the notes.

The rating for Series B also reflects the relatively high expected recoveries associated with the 41.9% of secured loans in the portfolio. The tranche’s repayment is driven by the slow amortisation of these assets. This results in a long weighted average life of 7.6 years even under 15% of prepayments for the tranche.

Banco de Sabadell (the originator) is the sole counterparty for the transaction. Scope believes that the credit quality of the bank, considered resolvable and systemically important in Spain, supports the current ratings for the notes. Scope assessed the credit quality of Banco de Sabadell using public information provided by the bank. In addition, the bank’s ongoing operational involvement is positive for the transaction because of its strong record as an experienced SME lender in Spain.

Sabadell’s structural replacement as account bank upon the loss of an issuer rating of BBB- by Scope provides additional comfort. Scope however considers this replacement trigger as currently constraining the Series A rating.

Key rating drivers

Ongoing improvement of Spanish economy (positive). Spain’s recovery will continue to benefit Series A notes in the short term, whereas the impact on Series B is less certain due to its longer weighted average life, which increases exposure to persisting long-term macroeconomic risks stemming from fundamental imbalances of the Spanish economy.

Limited delinquency levels (positive). Total delinquencies are 6.77% of the outstanding balance as of 31 May 2017, 80.9% thereof relate to ‘30 days’ delinquencies that are mostly technical and highly likely to be subsequently cured; ‘above 90 days’ delinquencies are rising but remain low at 0.65% of the current portfolio. No defaults have been reported, mainly due to the ‘360 days past due’ default definition which delinquencies have not yet passed.

Non-amortising reserve fund (positive). The reserve fund will provide growing credit enhancement in relative terms as the transaction amortises.

High expected recovery rate (positive). Low loan-to-value ratios on mortgages (weighted average of 47%) drive the relatively high expected portfolio recovery rate of 42.1% under the AA stress scenario and 53.8% under a BB stress scenario.

High default volatility risk (negative). Delinquency vintage data presented to Scope at closing showed significant levels of volatility, which signals increased probability of high default rate scenarios under stress. 

Key rating-change drivers

Faster recovery of employment (positive) in Spain would support lower default-rate assumptions. Scope does not expect this fast recovery of employment to occur during the remaining life of the transaction.

Crystallisation of weak-obligor risk (negative) would impact the Series B notes. This risk lies mainly beyond the risk horizon of Scope’s positive outlook for the Spanish economy. Recovery stagnation or even a new recession could again create significant stress for SMEs. 

Quantitative assumptions

Scope has analysed the transaction by considering the two portfolio segments, whose proportions have been updated as of 31 May 2017 investor reporting. Unsecured loans account for 58.1% of the portfolio and secured loans account for 41.9% of the portfolio. Scope has applied the same key analytical assumptions as at the date of closing. The key assumptions are:

• Unsecured loans: mean lifetime ‘90 days past due’ default rate of 5.0%, a coefficient of variation of 84.7% and a base case recovery rate of 27%. Scope also considered a long-term default rate of 5.4% and a coefficient of variation of 80.0% to account for fluctuations through a full economic cycle.
• Mortgage secured loans: mean lifetime ‘90 days past due’ default rate of 10.0%, a coefficient of variation of 95.3% and a base case recovery rate of 77.9%. Scope also considered a long-term default rate of 9.8% and a coefficient of variation of 56.0% to account for fluctuations through a full economic cycle.

Scope has used monthly collateral reports up to 31 May 2017 and the first three quarterly note-payment reports up to 22 May 2017.

Rating sensitivity 

Scope tested the resilience of the rating against deviations of the main input parameters: the portfolio mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the quantitative results to input assumptions and is not indicative of expected or likely scenarios. The following shows how the quantitative results for each rated tranche change when the portfolio’s expected default rate is increased by 50% or the portfolio’s expected recovery rate is reduced by 50%, respectively:

• Series A: sensitivity to default rate assumptions, zero notches; sensitivity to recovery rates, zero notches;
• Series B: sensitivity to default rate assumptions, two notches; sensitivity to recovery rates, two notches.

About the transaction

IM Sabadell PYME 10, FT is a true-sale securitisation of a currently EUR 1,272m portfolio comprised of mortgage secured loans (41.9%) and unsecured loans (58.1%) granted to Spanish SMEs to finance diverse business needs. The transaction closed 3 August 2016. The assets were originated by Banco de Sabadell. The bank is an experienced originator with a business model that focuses on SME obligors. This model allows the bank to benefit from the private-sector-driven recovery of the Spanish economy.

Legal and regulatory 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
Responsible for approving the rating: Guillaume Jolivet, Committee Chair

Rating history
Instrument; ISIN; Date; Rating action; Rating
ES0305154009; 04.08.2016; Upgrade; AA+(SF)
ES0305154017; 04.08.2016; Upgrade; B+(SF)
ES0305154009; 03.08.2016; New; AA(SF)
ES0305154017; 03.08.2016; New; B(SF)
ES0305154009; 28.07.2016; Preliminary; (P) AA(SF)
ES0305154017; 28.07.2016; Preliminary; (P) B(SF)

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate from the issuer of the investment, represented by the management company. The issuer has participated in the rating process.
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, hold 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
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources. Historical data used for this rating is limited. Monthly investor reports produced by InterMoney Titulización Sociedad Gestora de Fondos de Titulización S.A, covering the first nine months since the closing of the transaction up to the report dated May 2017; and proprietary information from Scope Ratings AG.
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, use of confidential information, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodologies applicable for this rating are the ’SME ABS Rating Methodology’, the ‘Methodology for Counterparty Risk in Structured Finance’, and the‘General Structured Finance Rating Methodology’. Files are available on www.scoperatings.com. Additionally, the new issue report IM Sabadell PYME 10, FT explains the framework and assumptions for the recovery analysis Scope has performed.
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
© 2017 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings AG, Scope Analysis GmbH, 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.