Rating action

• Serie A (ES0305274005), EUR 759.3m outstanding amount: affirmed at AAA_SF
   
• Serie B (ES0305274013), EUR 171.5m outstanding amount: downgraded to BB_SF from BB+_SF

The review incorporates information provided in the transaction report for the period up to 31 December 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 (61% of the portfolio’s outstanding balance) and secured consumer loans backed by residential mortgages (39%). The transaction amortises sequentially and its legal maturity is 20 March 2053.

Rating rationale

The rating actions reflect the transaction’s deleveraging and collateral performance. Serie A notes have amortised to EUR 759.3m (a 67% decrease in the Serie A balance at closing) and credit enhancement available to protect Serie A has significantly increased to 22.9% from 11% since closing.

The downgrade of Serie B reflects the worse-than-expected collateral performance. Credit enhancement to the Serie B noteholders is solely provided by the amortising cash reserve, amounting to 4.5% of the outstanding notes’ balance.

Key rating drivers

Increased credit enhancement (positive). The level of credit enhancement for Serie A has increased to 22.9% from 11% at closing, and risen slightly for Serie B to 4.5% from 4% at closing.

Significant excess spread (positive). The high excess spread that can be used to cover periodic losses and liquidity shortfalls is credit supportive. The spread between the weighted average rate from the assets and the cost of liabilities is 4.9%, after Scope’s senior fee assumptions.

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

Weak collateral performance (negative). The collateral’s cumulative default rate over the initial balance (2.8%) and marginal recovery given default (2.3%) as of December 2019 have fallen short of Scope’s initial expectations. The downgrade of Serie B mainly reflects the note’s sensitivity to performance deterioration, especially against the backdrop of more uncertain macro-economic conditions.

Interest rate risks (negative). The pool contains a significant portion of fixed-rate assets (75%) while the liability side is a floating-rate coupon referenced to three-month Euribor. This interest mismatch risk is mitigated by the short transaction life of Serie A notes (1.9 years under a zero prepayment assumption). The Serie B rating captures its exposure to interest rate risk due to its longer expected weighted average life (12 years under a zero prepayment assumption).

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 in any given period, it will flow to the originator.

Rating-change drivers

Positive. Further transaction deleveraging may result in rating upgrades for the Serie 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 default 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 based on the portfolio’s 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.

The rating agency 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 has updated its assumptions based on the transaction’s performance as well as Spanish economic and political developments, increasing the default assumption, lowering the recovery rate assumption and lengthening the work-out period. The default level is above Scope’s expectation and the recovery performance is subdued owing to tepid economic growth in Spain. In addition, Spain’s fractured political environment makes the formation of a stable coalition less likely, which is essential for implementing the much-needed reforms to address economic vulnerabilities. A faster reduction in the unemployment rate would be difficult to achieve without the reforms. Both the structural unemployment rate and the structural fiscal deficit are also likely to remain the highest in the euro area. Scope has reflected the macro-economic factor in its analysis of the unsecured (general-purpose) consumer loans.

The transaction was analysed under high (15%) and low (0%) prepayment scenarios.

Sensitivity analysis

Scope tested the resilience of the assigned ratings against deviations in 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, three notches; sensitivity to recovery rates, zero notches.
   
• Serie B: sensitivity to default rate assumption, three notches; sensitivity to recovery rates, three 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 1.1.1, 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 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 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/asset audit. 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 ratings are issued by Scope Ratings GmbH.
Lead analyst: Iris Sie, Senior Analyst
Person responsible for approval of the rating: Antonio Casado, Executive Director
The final ratings were first released by Scope on 26 July 2017. The ratings were last updated on 3 April 2019.

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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