The rating actions are as follows:

SIUGI Senior Risk Cover, EUR 1,133.9m*: upgrade to AAA_SF, from AA+_SF
SIUGI Upper Mezzanine Risk Cover, EUR 124.3m*: upgrade to A+_SF, from A-_SF

*Outstanding amounts reflect amortisation and defaults as of 31 March 2018 and risk cover sizes, considering a fully ramped portfolio.

The rating actions incorporate portfolio updates provided by the European Investment Bank Group up to the latest reporting date, 31 March 2018.

Rating rationale

The rating actions are driven by an increase in credit enhancement as a result of amortisation and the solid performance of the reference portfolio. This is illustrated by the 90-days-overdue assets in the portfolio which account for 0.33% of ramped and outstanding portfolio balances; the default rate of 1.64% of the ramped portfolio’s original balance; and amortisation at 27.9%. Credit enhancement available to the Senior Risk Cover and the Upper Mezzanine Risk Cover has increased to 43.7% and 37.4%, respectively, compared with 38.1% and 32.5% at last the monitoring date. The rating actions also reflect the evolution of the reference portfolio, characterised by EUR 4,128.2m of assigned assets, and 25.2% yet to be ramped up.

Scope considers the transaction’s average asset quality to be weaker than that of traditional Spanish cash SME securitisations. However, the obligors in the respective reference portfolios benefit from the currently supportive macroeconomic environment. 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.

The upgrades reflect Scope’s positive outlook on Spain’s macroeconomic environment and the stabilisation of SME credit profiles due to corporate deleveraging and better debt affordability. The ratings also incorporate the ongoing 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 1.4 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 European Investment Fund (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 a great degree of flexibility in selecting higher-risk assets. Originators also have incentives to include higher-yielding assets.

Partially ramped portfolio (negative). A material proportion (25.2%) 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 and the operational supervision.

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

Rating-change drivers

Positive. 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 realignment of the international order. Scope believes that this risk is still highly remote – evidenced in part by the intervention and actions of the Spanish government following the illegal referendum and new elections in Catalonia. Furthermore, its crystallisation would occur beyond the expected life of the Senior Risk Cover.

Quantitative analysis

Scope’s analysis incorporates the updated originators’ shares in the reference portfolio and the updated ramp-up status of the portfolio, now at 74.8%. Scope took into account the delinquent assets (more than 15 days in arrears) and defaulted assets in the reference portfolio to date.

Scope 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 provided the expected loss and expected weighted average life of each rated tranche. Scope considered changes in the reference portfolio’s composition and the proportion of non-performing and defaulted assets.

Scope assumed a point-in-time mean default rate of 18.6% and a coefficient of variation of 40.6%. Scope also considered a long-term reference, assuming a mean default rate of 8.3% with a coefficient of variation of 76.4%. Scope’s rating-conditional asset recovery rate assumptions were 22.0% for the Senior Risk Cover and 27.8% for the Upper Mezzanine Risk Cover.

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

Rating sensitivity

Scope 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 decreases by 50%, respectively:

• Senior Risk Cover: sensitivity to default rate assumptions, one notch; sensitivity to recovery rates, two notches;
• Upper Mezzanine Risk Cover: sensitivity to default rate assumptions, four notches; sensitivity to recovery rates, three 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 EIF. The EIF has entered into bilateral guarantees with each participating bank. The risk takers in the transaction are the European Investment Bank (EIB), the EIF, the EU, and the Kingdom of Spain.

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.

The reference portfolio is currently 74.8% ramped. Thus, accounting for amortisation, the actual outstanding amounts of the risk covers as of 31 March 2018 are:

• SIUGI Senior Risk Cover, EUR 652.9m; and
• SIUGI Upper Mezzanine Risk Cover, EUR 92.9m.

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: David Bergman, Executive 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
© 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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