The rating action is as follows:

Class A (ISIN ES0305306005), EUR 780.0m: preliminary rating (P)AAA_SF
Class B loan, EUR 120.0m: not rated

Rating rationale

The preliminary ratings reflect: i) the legal and financial structure of the transaction; ii) the credit quality and characteristics of the underlying collateral in the context of the Spanish macroeconomic environment; iii) the transaction-specific protection features; iv) the ability of Abanca as originator/seller and servicer; v) the exposure to Santander S.A. (Santander) as account bank and paying agent; vi) and the management ability of Haya Titulización SGFT, S.A. (Haya).

The rating reflects Class A’s 17.8% credit enhancement, provided by subordination and by the reserve fund, which generates material support to protect the tranche against losses. The combined interest and principal priorities of payments ensures liquidity support beyond the reserve for the payment of interest to Class A.

The rating incorporates Scope’s 2018 outlook on Spain’s macroeconomic environment and the ongoing improvement of debt affordability in the country. Scope’s analysis also considers the current institutional uncertainty in Catalonia, which may result in adverse long-term economic effects.

The rating also reflects the replacement mechanisms available to mitigate counterparty risk exposure to Santander as account bank and paying agent, as well as short cash sweeps and a reserve available to limit risk exposure to Abanca as servicer. 

Key rating drivers

Asset selection (positive). The portfolio comprises loans with an average seasoning of 8.9 years. These loans largely survived Spain’s last economic crisis, demonstrating the resiliency of their underlying borrowers. The portfolio exhibits a relatively low weighted average current loan to value (CLTV) of 68.7%.

No restructured assets (positive). The portfolio does not include restructured or refinanced assets, which are not eligible.

Strong structure (positive). The full subordination of class B interest and principal payments, an adequately sized cash reserve, and the combined priorities of payments, provide robust protection against credit and liquidity risk.

Amortisation profile of the assets (negative). 87% of the loans in the portfolio have increasing instalment loans resulting in a borrower’s final instalment being as much as 1.3x larger than the initial instalment. Scope’s coefficient of variation assumption captures uncertainties associated with the borrowers’ ability to pay increased loan instalments.

Geographic concentration (negative). Regional diversification is relatively low (45.4% of the portfolio is concentrated in Galicia), which exposes the portfolio to increased idiosyncratic risk. However, Abanca has a strong presence in the region and has an intimate understanding of its borrowers and market.

Basis and reset risk (negative). The structure is unhedged. The notes and the underlying collateral pay a variable rate linked to Euribor 3-months and Euribor 12-months, respectively. Scope has sized for interest basis and reset risk exposure in its analysis.

Positive rating-change driver. Faster-than-expected portfolio amortisation may benefit the ratings if credit enhancement builds up before credit losses crystallise.

Negative rating-change driver. A higher-than-expected default rate or lower-than-expected recovery upon asset default could negatively impact the ratings.

Quantitative analysis and key assumptions

Scope has performed a cash flow analysis that incorporates important mechanisms in the structure. Scope applied its large homogenous portfolio approximation approach when analysing the highly granular collateral pool and projecting cash flows over its amortisation period. Scope analysed the transaction assuming a single asset segment for residential mortgage loans issued to private borrowers. The cash flow analysis considers the probability distribution of portfolio default rates, following an inverse Gaussian distribution, to calculate the expected loss of each rated tranche. The analysis also provides the expected weighted average life of each tranche. Scope has taken into account asset and liability amortisation and the evolution in the pool composition.

Scope has assumed a point-in-time default rates of 14.5%, a coefficient of variation of 55%, and a rating-conditional fixed recovery assumption of 51.2% for the Class A notes.

Scope has taken into account default rate and recovery vintage from 2010 to 2016 for the portfolio, which reflects the performance of the mortgage book originated by Abanca and its predecessor entities since 2010. The observation period for mortgage origination by Abanca and its predecessor entities is relatively short at approximately 7 years. However, the period includes the severe recession experienced in Spain from 2010-2014. Scope also used the performance data related to the previous two transactions originated in 2008, from which a portion of the securitised assets belonged to originally.

Scope did not consider a long-term reference default distribution because the observations available, notably those from the two previous transactions, capture a full economic cycle of performance that is sufficient to derive a long-term forward-looking view on the portfolio.

Scope considered the assets’ amortisation characteristics and assumed a default timing reflecting a constant default intensity. Scope assumed a portfolio margin of 50 bps, which incorporates a 15 bps margin stress to address: i) lower excess spread via prepayments, amortisation and defaults; ii) flexibility available to the servicer to modify the loan; and iii) interest rate mismatches between assets and liabilities.

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 rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results changes when the portfolio’s expected default rate increase by 50% and the portfolio’s expected recovery rate reduce by 50%, respectively:

Class A: sensitivity to probability of default, two notches; sensitivity to recovery rates, two notches.

Methodology

The methodologies applied for this preliminary rating were the General Structured Finance Methodology, dated August 2017, and the Rating Methodology for Counterparty Risk in Structured Finance Transactions, dated August 2017. All documents are available on www.scoperatings.com.

Scope analysts are available to discuss all the details of the rating analysis and the risks to which this transaction is exposed.

Regulatory and legal disclosures

This credit rating is issued by Scope Ratings AG. The rating analysis was prepared by Thomas Miller-Jones, Associate Director. Responsible for approving the rating: Guillaume Jolivet, Managing Director. The ratings were first assigned as final ratings by Scope on 20.12.2017. The ratings were last updated on 20.12.2017.

Methodology
The methodology used for these ratings, ‘General Structured Finance Rating Methodology’ dated August 2017 and the ‘Methodology for Counterparty Risk in Structured Finance’ dated August 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, public domain, 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. 
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
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