Series A, EUR 589.3m: upgrade to AA_SF, from A+_SF
Series B, EUR 198m: affirmation at B-_SF

The rating action incorporates information available from transaction reports from the latest reporting date, 22 March 2018.

Rating rationale

The rating actions are driven by a combination of the improved credit profile of key transaction counterparties, deleveraging of the transaction, and solid performance of the portfolio to date. The Series A notes have amortised to EUR 589.3m (83.9% of the Series A balance at closing). Credit enhancement for the tranche has increased to 28.6% from 25.0% at closing. Cumulative defaults and 90 days-past-due loans are 1.51% and 1.06%, respectively, which is only slightly above Scope’s expectations at closing. The transaction also benefits from the positive macro-economic momentum observed in Spain. The transaction is, however, exposed to longer-term future uncertainties because of the non-conforming nature of the obligors in the pool and long loan maturities.

Banco Santander SA’s 7 June 2017 acquisition of Banco Popular is credit-positive for the transaction given Santander’s credit quality (rated AA- by Scope).

Key rating drivers

Counterparty credit quality (positive). Counterparty credit quality limits commingling risk and provides increased counterparty rating stability for the transaction despite a replacement trigger for the account bank at loss of BB.

Credit enhancement (positive). The loss-absorbing protection provided by the structure to Series A is significant, as credit enhancement for the senior notes is now 28.6%.

Improving Spanish economy (positive). The Spanish economy continues to improve, which particularly benefits the Series A tranche.

Long maturity (negative). The portfolio will amortise slowly, making it vulnerable to future economic shocks. The expected weighted average lives of the Series A and Series B notes are 8.9 years and 12.6 years, respectively.

High loan-to-values (negative). The weighted average loan-to-value of the portfolio remains relatively high at 87.7% (101.6% at closing), which has a negative impact on possible recovery proceeds.

Substantial foreign obligor exposure (negative). Mortgages to foreigners represent 19.2% of the portfolio. This represents negative selection bias in the portfolio as this segment exhibits a higher default risk.

Rating-change drivers

Positive. A fast recovery of employment in Spain would lower the expected portfolio default rate. We do not expect this fast recovery of employment to occur, but rather, a slow recovery.

Negative. Home-price corrections bringing Spanish property markets below their long-term sustainable level would reduce expected recovery rates upon loan default. Scope sees this possibility as limited given Spain’s positive economic momentum.

Negative. A 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 realignment of the international order. Scope believes this risk is still highly remote, as evidenced in part by the intervention and actions of the Spanish government following the illegal referendum and new elections in Catalonia.

Quantitative assumptions and cash flow analysis

Scope performed a cash flow analysis of the transaction over the amortisation period, incorporating important structural mechanisms into the analysis. The agency used a large homogenous portfolio approximation approach to analyse the highly granular collateral pool. Scope assumed that portfolio defaults followed an inverse Gaussian distribution to calculate the expected loss of the rated tranche. The analysis also provided the expected weighted average life of each tranche, as well as the asset and liability amortisation. Scope analysed the securitised portfolio as a single pool.

Scope has assumed a mean default rate of 21.9% and a coefficient of variation of 48.0%. Scope assumed a rating-conditional recovery rate of 36.4% for the Series A notes and 53.2% for the Series B notes. Scope did not perform a long-term adjustment of portfolio default-rate assumptions to analyse the higher rating scenarios. We believe that the performance of this non-conforming mortgage portfolio over its long life will depend on its internal credit strength more than on its exposure to economic-cycle stresses. Consequently, we do not believe that the performance of the underlying portfolio will follow the average of the market

Scope analysed the transaction under a high (7%) and low (0%) prepayment assumption.

Stress testing

Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Rating sensitivity

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:

Series A: sensitivity to default rate assumption, no change; sensitivity to recovery rates, no change.

Series B: sensitivity to default rate assumption, no change; sensitivity to recovery rates, no change.

About the transaction

IM Grupo Banco Popular MBS 3, FT is a granular, true-sale securitisation of a EUR 900m portfolio at closing of non-conforming, first-lien, mortgage-secured loans granted by Grupo Banco Popular (Banco Popular Español SA and its fully owned subsidiary, Banco Popular Pastor SA) to Spanish individuals and resident/non-resident foreigners (19% at closing). The loans largely finance the purchase of residential properties in Spain. The transaction closed on 11 December 2015 with legal maturity of 22 December 2058.

Scope continuously monitors all rated notes from IM Grupo Banco Popular MBS 3, FT.

Ratings and research are available free of charge at www.scoperatings.com.

Methodology
The methodologies used for this rating(s) are the 'General Structured Finance Rating Methodology' and the ‘Methodology for Counterparty Risk in Structured Finance’. All files 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.
Scope analysts are available to discuss all the details of the rating analysis and the risks, to which this transaction is exposed.

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: public domain, 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 Ratings GmbH has relied on a third-party asset due diligence/asset audit. The external due diligence/ asset audit / internal analysis has no impact on the credit rating.
Prior to the issuance of the rating action, 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.

Regulatory disclosures
This credit rating is issued by Scope Ratings GmbH.
Lead analyst Thomas Miller-Jones, Associate Director
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The ratings were first released by Scope on 21 December 2015.

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
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, 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 GmbH at Lennéstrasse 5 D-10785 Berlin.

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