Rating action

The ratings are as follows:

Class A (ES0305426001): EUR 1,810.0m: assigned new AA_SF

Class B (ES0305426019): EUR 58.0m: assigned new BBB+_SF

Class C (ES0305426027): EUR 82.0m: assigned new BB+_SF

Class D (ES0305426035): EUR 30.0m: not rated

Class E (ES0305426043): EUR 20.0m: not rated

Class Z (ES0305426050): EUR 10.0: not rated

Transaction overview

The EUR 2.0bn transaction is a cash securitisation of primarily unsecured consumer loans originated by BBVA SA (A+/Stable Outlook) and extended to individuals in Spain. The transaction includes an 18-month revolving period.

The structure comprises six classes of notes, with classes A through E funding the EUR 2.0bn securitised portfolio, and the Class Z notes funding the EUR 10.0mn cash reserve. The fixed-rate notes are fully sequential and draw from combined principal and interest available from the collateral. Classes B through D each have a deferrable coupon feature and the EUR 10.0mn reserve fund provides liquidity and credit enhancement for Classes A through C. Credit enhancement for the rated notes – Class A: 10.0%, Class B: 7.1% and Class C: 3.0% - is provided via subordination and the cash reserve, as well as excess spread (4.6% per annum assumed at closing), measured as the minimum covenanted yield from the assets (6.0%) less stressed senior fees and expenses of (1.0%) and interest on the rated notes. The notes pay quarterly with a legal maturity of 18 September 2033.

Rating rationale

The ratings reflect the legal and financial structure of the transaction, the quality of the underlying collateral in the context of the Spanish macroeconomic environment; the ability of the originator and servicer, Banco Bilbao Vizcaya Argentaria SA (BBVA); the counterparty credit risk exposure to BBVA as account bank and paying agent; and the management ability of Europea de Titulización SGFT SA (EdT).

The ratings factor in the notes’ protection against portfolio losses, provided by their respective credit enhancement and excess interest from the assets. At the conclusion of the 18-month revolving period, the Class A rating benefits from sequential note amortisation. This, together with the fact that all assets are fully amortising results in a short expected weighted average life of 1.8 years for the Class A notes from the end of the revolving period. The Class B and Class C ratings reflect the tranches’ exposure to uncertainties in the Spanish economy beyond Scope’s outlook, as well as significantly lower credit enhancement of 7.1% and 3.0%, respectively.

Key rating drivers

Excess spread (positive). Significant excess spread (4.6% assumed at closing) protects against potential collateral losses.

Deferrable coupons (positive). Deferable coupons on Classes B through D benefits the Class A notes in the event of higher than expected defaults.

Experienced originator (positive). BBVA has a strong performance track record when benchmarked against Spanish originators.

Revolving portfolio (negative). The credit quality of the portfolio can negatively migrate during the 18-month replenishment period. This risk is mitigated by the originator’s expertise combined with adequate single-asset, portfolio and performance covenants.

Counterparty concentration (negative). BBVA performs all counterparty roles in the transaction. Counterparty risk from financial exposure to BBVA as account bank and paying agent is mitigated by both the bank’s high credit quality (A+/Stable Outlook and by a replacement mechanism should its issuer rating fall below BBB.

Cash reserve (negative). The cash reserve is not a significant source of liquidity or credit enhancement for the rated notes. At closing the reserve covers approximately one interest period of fees and interest. Additionally, there is no lock-out period and the reserve dynamically amortises as a percentage of the class A through C notes to a floor of EUR 2.5mn. This is partially offset by excess spread and BBVA’s strong issuer credit profile.

Rating-change drivers

Positive rating-change driver. Fast-than-expected portfolio amortisation may benefit the ratings if credit enhancement builds up before losses crystallise.

Negative rating-change driver. Higher-than-expected defaults and/or lower than expected recoveries upon asset default will negatively impact the ratings.

Quantitative analysis and assumptions

A cash flow analysis was performed considering the collateral portfolio’s characteristics and the transaction’s main structural features. Scope applied a large homogenous portfolio approximation approach when analysing the collateral pool and projecting cash flows over the expected amortisation period. The cash flow analysis used a probability distribution of the portfolio’s default rate, following an inverse Gaussian distribution, to calculate the expected loss of each rated tranche. The analysis also provides the expected weighted average life of each tranche.

A portfolio mean default rate of 5.0% and a coefficient of variation of 60.0% were applied over the portfolio’s expected weighted average life of 3.2 years. Scope considered a base case recovery rate of 20.0%, which after the application of an 8% haircut on the BB level, 16% on the BBB level and 32% on the AA level gives the following rating-conditional recovery rates: 18.4% for BB, 16.8% for BBB, and 13.6% for AA. A 6.0% portfolio yield was also assumed in the analysis.

Scope has taken into account default rate and recovery vintage data from 2009 to 2018 for the securitised portfolio, which reflects the performance of the loan book originated by BBVA. This period captures a severe recession realised in Spain. As a consequence, Scope did not consider a long-term reference default distribution because the data analysis captures more than a full economic cycle of performance.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations of the main input parameters: the mean-default rate and the recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results change when the portfolio’s expected mean default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

Class A: sensitivity to default rate, five notches; sensitivity to the recovery rate, two notches,

Class B: sensitivity to default rate, four notches; sensitivity to the recovery rate, one notch,

Class C: sensitivity to default rate, four notches; sensitivity to the recovery rate, one notch.

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.

Methodology
The methodologies used for the ratings, the ‘Consumer and Auto ABS Rating Methodology’, the ‘General Structured Finance Rating Methodology’ and the ‘Methodology for Counterparty Risk in Structured Finance’ ’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 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 received a third-party asset audit. The external asset audit was considered when preparing the rating and it has no impact on the credit rating.
Prior to the issuance of the rating or outlook 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 and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Thomas Miller-Jones, Associate Director
Person responsible for approval of the rating: David Bergman, Managing Director
The final ratings were first released by Scope on 9 July 2019.
The final ratings concern financial instruments, which have been rated by Scope for the first time.

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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