Scope assigns BBB-(SF) to class A notes issued by Prosil Acquisition S.A. – Spanish NPL ABS
Scope Ratings has today assigned final ratings to the notes issued by Prosil Acquisition S.A., compartment "Cell Number 5", a static cash securitisation of Spanish REO properties and of NPLs originated by different entities in Abanca Group.
The rating actions are as follows:
XS1843432078 Class A, Euro 170,000,000: assigned a rating of BBB-SF
XS1843431930 Class B, Euro 30,000,000: assigned a rating of B-SF
XS1843431856 Class J, Euro 15,000,000: not rated
XS1843431773 Class Z, Euro 16,000,000, not rated
The transaction is a static cash securitisation of a Spanish non-performing loans (NPL) portfolio worth around Euro 494.7m by outstanding balance (OB) of NPLs and around Euro 40m by third party appraisal value of real-estate owned properties (REO), actively serviced by Hipoges. The NPL pool is mainly comprised of senior secured loans (94%), junior secured loans (1%), as well as unsecured loans and secured residual exposures (5%). The loans were extended to individuals (66%) and small and medium-sized companies (34%) and were originated by Abanca. The secured loans are backed by residential and non-residential properties, including land (68% and 32% of the total third-party appraisal value, respectively). As of the transfer date, the issuer will reallocate the portfolio from its compartments "Cell Number 1", "Cell Number 2" and "Cell Number 3" to "Cell Number 5", as well as all portfolio collections received since 1 April 2019 (portfolio cut-off date). The REO pool comprises residential, non-residential properties, and land (73%, 23%, and 4% of total third-party appraisal value, respectively).
There are four classes of notes with fully sequential principal amortisation: senior class A, mezzanine class B, and junior class J and equity Z. The class B interest payments rank senior to class A principal. However, they will be subordinated if the cumulative realised collections are 10% below the projected cash-flows indicated in the servicer’s business plan, if the net present value cumulative profitability ratio falls below 90%, or if the interest paid on class A notes is lower than the interest due. Class J interest is paid junior to class A and B interest and principal.
A cash reserve equal to 4.5% of Class A notes will be fully funded at issuance with Euro 4.1 million of collections received since April 2019 and remaining amount, with the proceeds of the notes. The cash reserve will amortise to 4.5% of the outstanding amount of class A notes, and it will be available to cover senior items in the waterfall and interest on class A notes. Any released amount from the cash reserve account will be entirely used to repay class A notes principal.
An expense reserve, equal to Euro 100,000 at closing date, will be funded by collections received since April 2019 and it will be available to cover recovery expenses.
The ratings are primarily driven by the expected recovery amounts and timing of collections from the portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics as well as Scope’s economic outlook for Spain and assessment of the special servicer’s capabilities. The ratings are supported by the structural protection provided to the notes, the absence of equity leakage provisions, the liquidity protection, and an interest rate hedging agreement.
The ratings also address exposures to the key transaction counterparties. In our view, none of these exposures limits the maximum ratings achievable by the transaction. In order to assess the issuer’s exposure to credit counterparty risks, Scope considered counterparty substitution provisions in the transaction, the public ratings, when available.
Key rating drivers
Granular and secured portfolio (positive). The NPL portfolio is mostly comprised of senior (1st lien) exposures (94% of OB) with relatively high granularity compared to other transactions. Except of one large position for which the OB is capped, the top 10 exposures represent around 5% of the total collateral value.
Updated valuations (positive). The servicers updated most of the properties’ appraisals in H2 2018. Servicer evaluations are generally more accurate than historical bank valuations. Around 53% of the appraisals rely on a desktop procedure and the remainder are either drive-by or full valuations, which tend to be more accurate than desktop valuations.
Liquidity protection (positive). A cash reserve equal to 4.5% of the class A provides liquidity protection to senior noteholders, covering senior expenses and interest on the class A notes for around 4 payment dates, under Scope’s base case scenario. Released amounts from the cash reserve account will be used to amortise class A notes.
Interest rate cap (positive). The transaction benefits from an interest rate cap, referencing to Euribor 3 month and with flat strike at 0.50%, which mitigates the interest rate risk arising from the floating nature on the notes. The notional of the interest rate cap adequately covers the expected class A and B notional under the stressed scenarios considered by Scope.
Geographically diversified pool (positive). The pool is well distributed between the different regions of Spain with some concentration in Galicia and Madrid areas.
No back-up servicer (negative). No back up servicer has been appointed at closing, increasing the potential length of disruption in case of servicer removal. In case of a servicer termination event, a committee formed by mezzanine and junior note holders will use all reasonable efforts to identify a suitable successor servicer in consultation with the issuer, and with the approval of class A noteholders.
Challenging legal environment (negative). There is a higher degree of legal uncertainty in Spain compared to other countries in the EU. For instance, due to increasing litigation on the abusiveness nature of certain mortgage early termination loan clauses, the average length of foreclosure proceedings in Spain has almost doubled in recent years. Additionally, the Spanish Supreme Court has recently ruled that secured creditors can no longer demand default interest after the opening of insolvency proceedings.
Relatively weak representations and warranties (negative). Representations provided by the sponsor are relatively weaker compared to market standards.
Real estate collateral not insured (negative). Only part of the REO portfolio is insured at closing and the committee of mezzanine and junior noteholders will decide, case by case, to either insured repossessed assets or not. As a result, noteholders might suffer losses linked to accidental damages to the properties. This risk is partially mitigated by the portfolio granularity.
Legal and other costs (upside). Scope factored in legal expenses and other costs for collections as detailed in the servicer’s business plan. A decrease in legal expenses and other costs could positively affect the ratings.
Servicer outperformance regarding recovery timing (upside). Consistent servicer outperformance in terms of recovery timing could positively impact the ratings. Portfolio collections will be completed over a weighted average period of 2.8 years according to the servicer’s business plan. This is about 2.4 years faster than the recovery timing vector applied in our analysis.
Collateral appraisal values (downside). NPL collateral appraisals have a high degree of variability due to the nature of the assets, which are likely to deteriorate in value due to lack of maintenance or obsolesce risk, the latter mainly on non-residential properties. If realised asset values are systematically below the appraisals values assumed by Scope after liquidity stresses, this could result in a rating downgrade. Historical data provided by the servicer shows that assets have been generally sold at levels relatively in line with updated appraisal values. In addition, a high portion of the assets are residential properties, which generally show lower volatility than non-residential assets.
Increased political intervention in Catalonia (downside). As per a recent law, the local government in Catalonia can force owners to rent residential properties that have been empty for more than 2 years to vulnerable families. Given the relatively low exposure to Catalonia, the current state and characteristics of the law should not represent a major risk for this transaction, but Scope will monitor the legal developments.
Quantitative analysis and key assumptions
Scope analysed cash flows that incorporate the transaction’s structural features in order to calculate the expected loss and weighted average life for each tranche. As a first step, Scope analysed the assets to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of non-performing loans and REO assets.
Scope employed a specific analysis for recoveries, using a different approach for secured and unsecured exposures. For secured exposures, collections were based mostly on the latest property appraisal values, which were stressed to account for liquidity and market value risks. Recovery timing assumptions were derived using line-by-line asset information detailing the type of legal proceeding, and the stage of the proceeding as of the cut-off date. For the REO assets, Scope estimated the time to sale based on historical data provided by the servicer and market data. For unsecured exposures, Scope used historical recovery data on defaulted loans, and calibrated recoveries considering that unsecured borrowers were classified as defaulted for an average of 3.4 years as of the cut-off date.
For the class A analysis, Scope assumed an expected collection rate (gross recovery rate) of 41.8% of OB over a weighted average life of 5.2 years, excluding collections already received. By portfolio segment, Scope assumed a gross recovery rate of 44.3% and 3.0% of OB for the secured and unsecured NPL portfolios, respectively. Scope applied an average combined security value haircut of 27.1% which considers: i) an average fire-sale discount (including valuation type haircuts) of 18.8% to security valuations, reflecting liquidity or marketability risks; and ii) moderate property price decline stresses (10.2% on average), reflecting Scope’s view of downside market volatility risk.
For the class B analysis, Scope assumed a gross recovery rate of 51.7% of OB over a weighted average life of 4.3 years, excluding collections already received. By portfolio segment, Scope assumed a gross recovery rate of OB equal to 54.8% and 3.6% for the secured and unsecured NPL portfolios, respectively. Scope applied an average combined security value haircut of 4.0% which considers: i) an average fire-sale discount (including valuation type haircuts) of 7.1% to security valuations, reflecting liquidity or marketability risks; and ii) property price appreciation (2.9% on average).
Scope captured single asset exposure risks by applying to the 10 largest borrowers a rating-conditional recovery rate haircut of 10% for the analysis of the class A notes and 0% for the analysis of the class B notes.
Scope tested the resilience of the ratings against deviations from expected recovery rates and recovery timing. 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.
Scope tested the sensitivity of the analysis to deviations from the main input assumptions: recovery rate and recovery timing.
For class A, the following shows how the results change compared to the assigned credit rating in the event of:
- a decrease in secured and unsecured recovery rates by 10%, 5 notches.
- an increase in the recovery lag by one year, 1 notch.
For class B, the following shows how the results change compared to the assigned credit rating in the event of:
- a decrease in secured and unsecured recovery rates by 10%, 2 notches.
- an increase in the recovery lag by one year, 0 notches.
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, considering 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.
The methodologies applied for this rating are the Non-Performing Loan ABS Rating Methodology and the Methodology for Counterparty Risk in Structured Finance. All documents are available on www.scoperatings.com. More details regarding Scope’s approach can be found above in the ‘rating rationale’ and ‘quantitative analysis and key assumptions’ sections.
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 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 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 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 due diligence assessment. The external due diligence assessment was considered when preparing the rating and it has no impact on the credit ratings.
Prior to the issuance of the rating, the rated entity was given the opportunity to review the rating and the principal grounds on which it is based. Following that review, the rating was not amended before being issued.
This credit rating is issued by Scope Ratings GmbH.
Lead analyst Paula Lichtensztein, Senior Representative
Person responsible for approval of the ratings: David Bergman, Managing Director
The preliminary ratings were first released by Scope on 10 July 2019
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.
Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Directors: Torsten Hinrichs and Guillaume Jolivet.