Rating action

• Serie A (ES0305274005), EUR 2,278.5m (EUR 1,285.5m outstanding amount): upgrade to AAA_SF from AA+_SF
• Serie B (ES0305274013), EUR 171.5m (EUR 171.5m outstanding amount): affirmed at BB+_SF

The review incorporates information available on the transaction report dated until 28 February 2019.

Transaction overview

Caixabank Consumo 3 is a static securitisation of consumer loans extended to borrowers in Spain and originated by CaixaBank, S.A (CaixaBank). The current portfolio contains two product types: unsecured consumer loans (70.4% of the portfolio’s outstanding balance) and secured consumer loans backed by residential mortgages (29.6%). The transactions follow sequential amortisation and its legal maturity is 20 March 2053.

Rating rationale

The rating actions are primarily driven by structural deleveraging and transaction performance is in line with expectations. Serie A notes have amortised to EUR 1,285.5m (44% of the Serie A balance at closing) and credit enhancement available to protect both rated notes has increased since closing.

The ratings also reflect the legal and financial structure of the transaction; counterparty exposure to CaixaBank, S.A (CaixaBank) as account bank, paying agent and servicer. Counterparty risk from financial exposures to CaixaBank as account bank and paying agent is mitigated by a replacement mechanism should its issuer rating fall below BBB-.

Key rating drivers

Increased credit enhancement (positive). The level of credit enhancement has increased to 18.5% from 11% at closing for serie A, and to 6.7% from 4% for serie B, mainly driven by fast amortization of unsecured consumer loans.

Significant excess spread (positive) High excess spread that can be used to cover periodic losses and liquidity shortfall strengthens credit support for the notes. The spread between the weighted average rate from assets and cost of liabilities is 6.1% (as of 31/12/2018), after 1% of senior fee assumptions.

Sequential amortisation (positive) The class A noteholders benefit from the full subordination of class B interest and principal; the transaction features a strictly sequential, combined waterfall with no deferral triggers.

Interest rate risks (negative) The pool contains significant portion fixed-rated asset (65.3%, as of 31/12/2018) while the liability side is a floating-rate coupon referenced to three-month Euribor. The interest mismatch risk is mitigated by the short transaction life for the class A notes (1.4 years under 15% of prepayment assumptions). Meanwhile, the class B rating captures its exposure to interest rate risk due to the longer expected weighted average life (7.3 years under 15% prepayment assumptions).

Long default definition (negative) Excess spread will not be available to provision for defaults until assets are written off according to the transaction’s 18-month default definition. If excess spread is not trapped to provision for defaults on any given period, it will flow to the originator.

Counterparty concentration (negative) CaixaBank performs all counterparty roles in the transaction. Counterparty risk to CaixaBank as the account bank and paying agent is mitigated by the bank’s stable credit outlook and its current rating above the BBB- replacement triggers. The exposure to CaixaBank as account bank does not limit the rating of this transaction as we believe the account bank risk is mitigated by the short-expected life of class A, the limited exposure, and the bank’s sufficient credit quality as assessed by Scope.

Rating-change drivers

Positive. Further transaction deleveraging may result in future rating upgrades for the class B notes if credit enhancement builds up before credit losses crystallise.

Negative. Higher-than-expected default rates and/or lower-than-expected recoveries upon asset defaults may negatively impact the ratings. Deteriorating market conditions beyond Scope’s economic outlook may also negatively affect the ratings.

Quantitative analysis and assumptions

Scope determined the expected loss and weighted average life of the rated notes considering the portfolio characteristics and the transaction’s main structural features, such as the notes’ priorities of payments, note size, the notes’ respective coupon, senior costs and servicing fees.

Scope applied its large homogenous portfolio approximation approach when analysing the collateral pool and projecting cash flows over the expected amortisation period. The cash flow analysis considers the probability distribution of the portfolio’s default rate, using an inverse Gaussian distribution. Scope assumed unsecured consumer loans a point-in-time portfolio mean default rate of 5.0% and coefficient of variation of 50% and assumed secured consumer loans a point-in-time mean default rate of 10.3% and coefficient of variation of 40%. Scope also considered a long-term economic cycle adjustment with a default distribution reflecting a long-term portfolio mean default rate of 3.4% and a coefficient of variation of 75% for unsecured consumer loans and 7.3% mean default and 60% coefficient of variation for secured consumer loans.

Defaulted secured and unsecured exposures are provisioned for once they reach the 18 months-past-due mark or as declared as a subjective default, respectively, in accordance with the transaction structure. Scope assumed a cure rate of 15.0% between the default date and the provisioning date for unsecured consumer loans and 31% for secured consumer loans. Scope also assumed rating-conditional recovery rates on non-cured exposures of 22% for the serie A notes, and 37% for the serie B notes.

Scope analysed the transaction under high (15%) and low (0%) prepayment scenarios.

Sensitivity analysis

Scope tested the resilience of the assigned ratings 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 assigned ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the 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:

• Serie A: sensitivity to default rate assumption, 4 notches; sensitivity to recovery rates, 2 notches.
   
• Serie B: sensitivity to default rate assumption, 3 notches; sensitivity to recovery rates, 3 notches.

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

Cash flow analysis
Scope performed a cash flow analysis of the transaction with the use of Scope Cash Flow SF EL Model Version 1*, incorporating default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

*Editor's Note: The cash flow model name was changed on 22 July 2019 to correct a typographical error.

Methodology
The methodologies used for these ratings (‘General Structured Finance Rating Methodology’, ‘Methodology for Counterparty Risk in Structured Finance’, ‘Consumer and Auto ABS Rating Methodology’) are available on www.scoperatings.com.
Historical default rates of the entities rated by 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.

Solicitation, key sources and quality of information
The rated instruments' issuer 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 instruments 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 received a third-party asset due diligence/asset audit provided at closing of the transaction upon initial assignment of the ratings. The external due diligence assessment/asset audit was considered when preparing the rating and it has no negative impact on the credit rating.
Prior to the issuance of the rating action, the issuer and/or its agents were given the opportunity to review the rating and the principal grounds on which the credit rating is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Iris Sie, Senior Analyst
Person responsible for approval of the rating: David Bergman, Executive Director
The final ratings were first released by Scope on 26.07.2017.

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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