The rating actions are as follows:

SIUGI Senior Risk Cover, EUR 1,376.1m*: upgrade to AA+_SF, from AA_SF
SIUGI Upper Mezzanine Risk Cover, EUR 124.3m*: upgrade to A-_SF, from BBB+_SF
*Outstanding amounts reflect the amortisation and defaults as of 30 September 2017 and risk cover sizes, considering a fully ramped portfolio.

The rating actions incorporate portfolio updates, provided by EIB Group up to the latest reporting date, 30 September 2017.

Rating rationale

The rating actions are driven by the solid performance of the reference portfolio. This is illustrated by the 90-days-overdue assets accounting for 0.29% of ramped and outstanding portfolio balances; the default rate at 0.80% of the ramped portfolio’s original balance; and the fast amortisation at 19.5% of the initial initiative balance. Credit enhancement available to Senior Risk Cover and Upper Mezzanine Risk Cover increased to 38.1% and 32.5% respectively, compared with 34.1% and 29.2% when Scope assigned the initial ratings. The rating actions reflect the evolution of the reference portfolio characterised by EUR 3,730.5m of assigned assets, and 32.4% yet to be ramped up.

Scope has assumed that the credit quality of the fully ramped portfolio will be commensurate with a B- rating. This reflects Scope’s view that the nine originators have a greater incentive to assign higher-risk assets to the reference portfolio. The transaction supports lending towards obligor categories whose risk profiles would typically limit banks’ lending capacity. As a result, Scope expects the transaction’s average asset quality to be worse than in traditional Spanish cash SME securitisations.

In addition, the rating actions factor in the amended risk exposures among the originators, which shifted from Banco Popular (-3.53% of total original exposure), to Bankia (+2.17%) and CaixaBank (+1.35%).

The upgrades consider Scope’s positive outlook on Spain’s macroeconomic environment and the continuing improvement in SME credit profiles due to corporate deleveraging and better debt affordability. The ratings also incorporate the current institutional uncertainty in Catalonia, which may result in adverse long-term economic effects.

Key rating drivers

Spanish economy (positive). The Spanish economy continues to improve, which particularly benefits the Senior Risk Cover, with an expected weighted average life of 1.6 years under a 0% conditional prepayment rate.

Alignment of interests (positive). The originators must maintain a minimum economic interest of 20% in each individual exposure they assign to the SME initiative, which mitigates moral hazard and adverse origination. Claims on recoveries are enforceable beyond the maturity of the transaction.

Operational supervision (positive). Under the transaction agreements, the EIF benefits from significant supervisory authority and can directly monitor the originators’ operations, which mitigates the risk that originators deviate from their standard procedures.

Flexible eligibility criteria and originator incentives (negative). The transaction’s asset eligibility criteria offer the originators high flexibility in selecting higher-risk assets. Originators also have incentives to include higher-yielding assets.

Partially ramped portfolio (negative). A material proportion (32.4%) of the underlying portfolio has not yet been ramped, which exposes the transaction to uncertainties regarding the ultimate portfolio. This risk is partially mitigated by asset eligibility criteria.

Asset credit quality (negative). Scope assumes the fully ramped portfolio’s average credit quality will be commensurate with a B- rating, reflected in the high lifetime default rate and default volatility assumptions.

Rating-change drivers

Positive. A better-than-expected portfolio credit quality at the end of the ramp-up period and better-than-expected performance of the assets could positively impact the ratings.

Positive. Faster-than-expected portfolio amortisation due to high prepayments that result in credit enhancement build-up may positively impact the ratings.

Negative. Worse-than-expected performance of the assets, such as a material increase in default rates, could negatively impact the ratings.

Negative. The strengthening of the separatist movement in Catalonia would raise concerns about its hypothetical exit from the euro area. Such an exit would require profound legal changes in Spain and a restatement of international order. Scope believes this risk is still highly remote and its crystallisation would occur beyond the expected life of the Senior Risk Cover. This is evidenced in part by the intervention and actions by the Spanish government following the illegal referendum and new elections in Catalonia.

Transaction amendments

Some bilateral guarantee agreements were amended to increase lending flexibility, though within reasonable limits. Scope considers the changes to be immaterial covered by the quantitative assumptions.

Amendments include the addition of financial leases in the eligibility criteria for some originators; a longer ramp-up period, to 39 months from the effective date from 24 months; for one originator, an increase in the share of assets with low ratings, to 30% from 10%; and a reduction in the maximum exposure to Banco Popular, re-allocated to CaixaBank and Bankia.

Quantitative analysis

Scope’s analysis incorporates the updated originators’ shares in the reference portfolio and to the updated ramp-up status of the portfolio, now at 67.6%. Scope has taken into account the delinquent assets (more than 15 days in arrears) and defaulted assets in the reference portfolio to date.

Scope has analysed the probability distribution of portfolio default rates, assuming an inverse Gaussian distribution, as well as the risk covers' release and loss-allocation mechanism. The analysis provides the expected loss and expected weighted average life of each rated tranche. Scope has considered changes in the reference portfolio’s composition and the proportion of non-performing and defaulted assets.

Scope has assumed a point-in-time mean default rate of 18.1% and a coefficient of variation of 40.4%. Scope also considered a long-term reference, assuming a mean default rate of 8.0% with a coefficient of variation of 76.4%. Scope’s rating-conditional asset recovery rate assumptions were 22.3% for the Senior Risk Cover and 28.2% for the Upper Mezzanine Risk Cover.

Scope has updated its portfolio assumptions for assets in the reference portfolio and for the transaction amendments.

Rating sensitivity

Scope has tested the resilience of the ratings against deviations in the main input parameters. i.e. the portfolio-mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results for each rated instrument change compared to the assigned rating when the portfolio’s expected default rate increases by 50%, or the portfolio’s expected recovery rate reduces by 50%, respectively:

• Senior Risk Cover: sensitivity to default rate assumptions, three notches; sensitivity to recovery rates, two notches;
• Upper Mezzanine Risk Cover: sensitivity to default rate assumptions, three notches; sensitivity to recovery rates, two notches.

About the transaction

The SME Initiative Uncapped Guarantee Instruments (SIUGI) for Spain is a bespoke European Union sponsored risk transfer transaction of Spanish SME credit rights (i.e. loans, revolving lines and financial leasing) originated by nine Spanish banks and managed by the European Investment Fund (EIF). The EIF entered into bilateral guarantees with each participating bank. The European Investment Bank (EIB), the EIF, the EU, and the Kingdom of Spain are risk takers in the transaction.

The banks originating the credit rights and benefiting from this initiative are Banco Cooperativo Español, Banco Popular, Banco Sabadell, Banco Santander, Bankia, Bankinter, CaixaBank, Ibercaja and Liberbank.
Scope did not assign ratings to the Middle Mezzanine Risk Cover, the Lower Mezzanine Risk Cover, or the First Loss Piece in the transaction. The transaction’s maturity is 31 December 2033.
 
Methodology
The methodology used for these ratings ‘General Structured Finance Rating Methodology’, ‘SME ABS Rating Methodology’, and the ‘Methodology for Counterparty Risk in Structured Finance’ 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 issuer of the rated instruments and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the issuer, the issuer’s 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 Ratings GmbH has not relied on a third-party asset due diligence/asset audit. Scope has performed its own analysis of the assets, based on information received from the issuer of the rated instruments or related third parties, which is not and should be not deemed equivalent to a due diligence or an audit. The internal analysis has no impact on the credit rating.
Prior to publication, the issuer of the rated instruments was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit ratings are based. Following that review, the rating was not amended before being issued.

Regulatory and legal disclosures
These credit ratings are issued by Scope Ratings GmbH.
The rating analysis was prepared by Sebastian Dietzsch, Associate Director.
Responsible for approving the rating: Guillaume Jolivet, Managing Director
The ratings were first assigned as final ratings by Scope on 08.05.2017. The ratings were last updated on 08.02.2018.

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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