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

Series A (ISIN: ES0305154009), EUR 613.1m: affirmed at AA+_SF
Series B (ISIN: ES0305154017), EUR 301.9m: upgrade to BBB_SF, from BB+_SF

Scope used monthly collateral reports up to 28 February 2018 and the quarterly note-payment reports up to 20 February 2018.

Rating rationale

The rating actions reflect increased credit enhancement for the rated notes coupled with solid collateral performance since closing. Series A and series B credit enhancement has increased to 42.08% and 9.09%, respectively. Assets classified as over 90 days past due currently comprise just 0.79% of the portfolio. The structure has deleveraged as a result of a 13.94% prepayment rate per annum.

The rating for Series B reflects the relatively high expected recoveries associated with the secured loans in the loan pool, accounting for 48.1% of the outstanding portfolio. The tranche’s repayment is driven by the slow amortisation of these assets. This results in a relatively long weighted-average life of 6.2 years, assuming a 15% prepayment scenario.

The upgrade takes into account the macro-economic uncertainties in Spain beyond Scope’s 18-month outlook. The ratings also incorporate the current institutional uncertainty in Catalonia, which may result in adverse long-term economic effects.

Sabadell’s replacement as account bank upon the loss of a BBB- issuer rating by Scope partially mitigates counterparty risks in the transaction. However, this replacement trigger level currently constrains the Series A rating.

Scope assessed the credit quality of Banco de Sabadell using public information. 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.

Key rating drivers

Asset performance (positive). 90 days past due delinquencies make up 0.79% of the outstanding balance as of 28 February 2018. Defaults as a percentage of the original balance at closing are only 0.49%. Prepayments have led to fast structural deleveraging, benefiting both classes of the rated notes.

Spanish economy (positive). The Spanish economy continues to improve, which benefits the transaction. Over the longer term the current positive economic momentum will level out.

Experienced SME lender (positive). Scope regards the operational involvement of Banco Sabadell as positive for this transaction because it is an experienced SME lender in Spain with a good performance track record, as supported by information provided by the bank.

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

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

Unhedged interest rate risk (negative). The transaction is exposed to interest rate risk because 33.8% of the assets – mostly unsecured loans – pay a fixed-rate coupon, whereas the notes receive variable interest. This risk is not mitigated in the structure and results in excess spread compression under rising interest rate scenarios. Scope has factored this into its analysis.

Rating-change drivers

Positive. Better-than-expected default and recovery performance may positively impact the ratings.

Positive. Faster-than-expected portfolio amortisation, due to high pre-payments resulting in credit enhancement build-up, may positively impact the ratings.

Negative. Crystallisation of weak-obligor risk may impact the Series B notes. This risk lies mainly beyond the risk horizon of Scope’s Stable Outlook for the Spanish economy. Recovery stagnation or even a new recession could create renewed stress for SMEs.

Negative. The strengthening of the separatist movement in Catalonia may 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 remote given the outcome of the recent regional elections. Furthermore, its crystallisation would occur beyond the expected life of the class A.

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 analysed the transaction by considering the two portfolio segments whose proportions were updated using 28 February 2018 reporting data. Unsecured loans account for 51.9% of the portfolio and secured loans account for 48.1% of the portfolio. Scope applied the same assumptions as at the date of closing. These assumptions are:

• Unsecured loans: mean 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 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.
• High (15%) and low (0%) prepayment assumptions.

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 decreases by 50%, respectively:

• Series A: sensitivity to default rate assumptions, no change; sensitivity to recovery rates, no change;
• Series B: sensitivity to default rate assumptions, no change; sensitivity to recovery rates, no change.

About the transaction

IM Sabadell PYME 10, FT is a true-sale securitisation backed by a EUR 883.3m portfolio, composed of mortgage secured loans (48.1%) and unsecured loans (51.9%) granted to Spanish SMEs to finance diverse business needs. The transaction closed on 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.

Scope continuously monitors all rated notes from IM Sabadell PYME 10, FT.

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

Methodology
The methodology applicable for this final rating is the ‘SME ABS Rating Methodology’, 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 rating was first released by Scope on 28.07.2016.
The rating was last updated on 21.08.2017.

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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