Scope Ratings (Scope) has reviewed the performance of BBVA-10 PYME FT and taken the following credit rating actions on the issued notes:

Class A (ISIN: ES0305110001): affirmed at AAA_SF
Class B (ISIN: ES0305110019): upgraded to BBB-_SF, from B+_SF

The rating actions incorporate the latest investor reports as of 31 October 2017 provided by PYME Fondo de Titulización.

Rating rationale

The rating actions are driven by the solid performance of the collateral pool, illustrated by the lower-than-expected delinquency rate (1.58% are 90+ days delinquent loans), low default rate (0.03%), and fast amortisation. Moreover, the transaction’s credit enhancement has increased since the last rating action in December 2016: to 76.9% from 39.5% for class A; 13.5% from 6.9% for class B. 

The reserve fund has the potential to amortise after the three-year lockup period ends on 14 December 2018. This would reduce class B credit enhancement to 10% of the outstanding portfolio should 90+ days delinquent loans fall below 1% of the outstanding non-defaulted balance. However, Scope considers this scenario unlikely.

The rating actions reflect Scope’s positive outlook on Spain’s macroeconomic environment as well as the ongoing improvement of SME credit profiles thanks to deleveraging and better debt affordability. On the other hand, Scope’s analysis also considers current institutional uncertainty in Catalonia, which may result in adverse long-term economic effects.

Key rating drivers

Credit enhancement (positive). The protection of the reserve fund, the robust excess spread net of any margin stress (i.e. 1.27% as of December 2017 vs 1.71% as of closing), and the unlikely amortisation of the reserve fund after the lockup period ends provide material credit enhancement to both classes.

High expected recovery rate (positive). This is supported by the portfolio’s growing share of mortgages, a segment with low LTVs and strong historical recovery rates.

High default volatility risk (negative). Delinquency vintage data show a significant level of default volatility, with a segment-weighted coefficient of variation of 60.5%.

Long-term default definition (negative). The transaction’s 18-month default definition may lead to more collateral defaults should the reserve fund amortise, while also reducing the efficacy of credit enhancement.

Quantitative assumptions

Scope’s cash flow analysis incorporates the main cash flow mechanisms in the structure. The expected loss of each tranche was calculated based on the probability distribution of portfolio default rates, following an inverse Gaussian distribution. The analysis also provides the expected weighted average life of each tranche. Scope has considered asset and liability amortisation, changes in pool composition, and the proportion of non-performing and defaulted assets.

Cash flow assumptions are the same as at closing, with the exception of portfolio inputs that were updated based on the latest investor report. The assumptions include a point-in-time mean default rate of 18.3% and a coefficient of variation of 60.5%. Scope has also taken into account the long-term reference, assuming a mean default rate of 11.1% with a coefficient of variation of 72.8%. A 20% cure rate was applied to both classes, and the rating-conditional recovery rate assumptions are 36% and 52% for class A and class B respectively.

Scope also considered the amount of delinquent and defaulted assets as per the latest report.

Scope identified that during the previous monitoring review in 2016, the delinquency balance was subject to an input error, which led to an overstatement by EUR 837,000. If Scope had corrected this item at the time, it might have positively affected the class B rating.

About the transaction

The transaction is a true-sale securitisation of mortgages and unsecured loans originated by BBVA and granted to Spanish SMEs and self-employed individuals. The transaction closed on 16 December 2015 and has since amortised from EUR 780m to an outstanding notional of EUR 289m as of 31 October 2017.

Regulatory and legal disclosures

This credit rating is issued by Scope Ratings AG. The rating analysis was prepared by Florent Albert, Associate Director. Responsible for approving the rating: Guillaume Jolivet, Managing Director. The ratings were first assigned as final ratings by Scope on 16.12.2015. The ratings were last updated on 13.12.2017.

Methodology
The methodology used for these ratings ‘General Structured Finance Rating Methodology’ dated August 2017, the ‘Methodology for Counterparty Risk in Structured Finance’ dated August 2017, and the ‘SME ABS Rating Methodology’ dated June 2017 are available on www.scoperatings.com.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to 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 definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: the rated entity, the rated entities’ agents, third parties and Scope internal sources. Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope has not undertaken any assessment of Agreed Upon procedures carried out at the level of underlying financial instruments or other assets of structured finance instruments. Scope relied on a third-party assessment for the ratings at issuance.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

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 and Scope Risk Solutions 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 does not, 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 other 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 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.

Scope Ratings AG, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 161306, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund; Chair of the Supervisory Board: Dr. Martha Boeckenfeld.