Rating action

• Class A (ES0305154009), EUR 288.4m: upgrade to AAA_SF from AA+_SF
   
• Class B (ES0305154017), EUR 301.9m: affirmed at BBB_SF

The rating actions incorporate information available from historical transaction reports through 28 February 2019.

Transaction overview

IM Sabadell PYME 10 is a static securitisation of loans extended to borrowers in Spain and originated by Banco de Sabadell SA (Banco Sabadell). The current portfolio contains two product types: unsecured consumer loans (41.6% of the portfolio’s outstanding balance) and secured consumer loans backed by residential mortgages (58.4%). The transactions follow sequential amortisation and its final legal maturity is 20 May 2049.

Rating rationale

The rating actions are primarily driven by structural deleveraging and transaction performance being better than Scope’s expectations. Serie A notes have amortised to EUR 288.4m and credit enhancement available to protect both rated notes has increased to 65.2% from 22.0% and 14.1% from 4.8% for the class A notes respectively B notes since closing.

The ratings also reflect the legal and financial structure of the transaction; counterparty exposure to Banco Sabadell as account bank, paying agent and servicer; and the management ability of Intermoney Titulización SGFT SA . Counterparty risk to Banco Sabadell is partially mitigated by a replacement mechanism should its issuer rating fall below BBB-.

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.

The ratings are also supported by the stable growth path of the Spanish economy.

Key rating drivers

Increased credit enhancement (positive). Serie A credit enhancement has increased to 65.2% from 22.0% at closing, while serie B credit enhancement has increased to 14.1% from 4.8%, mainly driven by fast amortisation of unsecured consumer loans.

Obligor performance (positive). 90+ delinquencies are 0.56% of the outstanding balance as of 28 February 2019. Cumulative defaults as a percentage of original balance at closing is 0.81%. Prepayments have led to fast structural deleveraging, benefiting both classes of rated notes.

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

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 track record of performance, as supported by information provided by the bank.

Unhedged interest rate risk (negative). The transaction is exposed to interest rate risk because 31.0% 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.

Long default definition (negative). The long asset default definition in the transaction (i.e. 12 months) hinders the ability to capture excess spread – except for loans subjectively classified by the originator as defaulted.

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.

Counterparty concentration (negative). Sabadell performs all counterparty roles. Counterparty risk to Sabadell is mitigated by the expected short life of the serie A; the credit quality of the bank as reflected in its current external ratings; and adequate structural protection features, which include the bank’s automatic replacement (as account bank and paying agent) upon loss of a BBB- rating.

Rating-change drivers

Positive. Further transaction deleveraging and increasing credit enhancement may positively impact the ratings.

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 85.0% and assumed secured consumer loans a point-in-time mean default rate of 10.0% and coefficient of variation of 95.0%. Scope also considered a long-term economic cycle adjustment with a default distribution reflecting a long-term portfolio mean default rate of 5.0% and a coefficient of variation of 80.0% for unsecured consumer loans and 9.8% mean default and 56.0% coefficient of variation for secured consumer loans.

Defaulted secured and unsecured exposures are provisioned for once they reach the 12 months-past-due mark or as declared as a subjective default, respectively, in accordance with the transaction structure. Scope assumed a cure rate of 10.0% for unsecured consumer loans and no cures for secured consumer loans. Scope also assumed rating-conditional recovery rates on non-cured exposures of 37% for the series A notes, and 57% for the series B notes.

Scope analysed the transaction under high (15%) and low (0%) prepayment scenarios and it also considered the interest rate risk stemming from the fixed rate loans in its analysis.

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, 0 notches; sensitivity to recovery rates, 0 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 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 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: Kreschma Nazary, Associate Director
Person responsible for approval of the rating: David Bergman, Executive Director
The final ratings were first released by Scope on 03 August 2016.

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
© 2019 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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