Rating action

• Class A (ES0305154009), EUR 138.5m outstanding: affirmed at AAA_SF
• Class B (ES0305154017), EUR 301.9m outstanding: upgraded to A-_SF from BBB_SF.

The rating actions incorporate information available from transaction reports through 31 January 2020.

Transaction overview

IM Sabadell PYME 10 is a static, true-sale securitisation of loans originated by Banco de Sabadell SA (Banco Sabadell). The current EUR 395.3m portfolio is composed of mortgage secured loans (69.9%) and unsecured loans (30.1%) granted to Spanish SMEs to finance diverse business needs. Class A and class B notes amortise sequentially and the floating rate coupons reference 3-month Euribor. The transaction closed on 3 August 2016 and its final legal maturity is 20 May 2049.

Rating rationale

The rating actions are primarily driven by increased credit enhancement for the rated notes and better than expected asset performance. Credit enhancement protecting class A and class B notes increased to 87.4% and 18.9% respectively, up from 22.0% and 4.75% at closing. The credit enhancement build-up has been driven by rapid amortisation of the portfolio (17.2% lifetime prepayment rate) and the non-amortising reserve fund. 90 day+ delinquencies account for 0.7% of the outstanding portfolio balance and cumulative defaults amount to 1.2% of the portfolio balance at closing.

The upgrade of class B is supported by the notes’ expected resilience to macro-economic uncertainties in Spain, including potential impacts of Covid-19. The class B rating is currently constrained by the counterparty exposure to Banco Sabadell, which performs all major counterparty roles in the transaction. We assessed the bank’s credit quality using public information.

Key rating drivers

Increased credit enhancement (positive). Class A credit enhancement has increased to 87.4% from 22.0% at closing, while class B credit enhancement has increased to 18.9% from 4.75%.

Asset performance (positive). 90+ delinquencies account for 0.7% of the outstanding balance as of 31 January 2020. Cumulative defaults as a percentage of the portfolio balance at closing is 1.2%. A 17.2% lifetime prepayment rate has also benefitted the rated notes.

Non-amortising reserve fund (positive). The reserve fund will provide increasing credit enhancement to the rated notes as the portfolio amortises.

Counterparty concentration (negative). The exposure to Sabadell constrains the rating of the class B notes, in accordance with Scope’s counterparty methodology. Sabadell performs all counterparty roles in this transaction, which includes servicer, account bank and paying agent. This is partially mitigated by Banco Sabadell’s credit quality and automatic replacement should it lose its investment-grade rating.

Unhedged interest rate risk (negative). The transaction is exposed to a fixed-floating interest rate asset-liability mismatch. The notes are 100% floating-rate instruments, while 28% of the portfolio balance (37% at closing) – mainly unsecured loans – pay a fixed coupon. This risk is partially mitigated through subordination and available excess spread of 1.46% (assuming a 1.0% servicer fee).

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.

Rating-change drivers

Positive: Further transaction deleveraging and the reduction of the transaction’s remaining life will gradually reduce the lifetime exposure to Sabadell and could lead to rating upgrades of class B.

Negative: A severe deterioration of the Spanish macroeconomic environment could negatively impact the ratings.

Quantitative analysis and assumptions

Scope Ratings has performed a cash flow analysis, considering the portfolio's characteristics and the transaction's main structural features, such as the notes’ priorities of payments, note size, the coupon on the notes, senior costs, as well as servicing fees. This analysis produces an expected loss and expected weighted average life for the notes.

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 analysed the transaction by considering the two portfolio segments with proportions reflecting 31 January 2020 reporting. Unsecured loans account for 30.1%, secured loans account for 69.9% of the portfolio. Scope maintained its mean default rate, coefficient of variation and recovery rate assumptions from closing. These assumptions are:

Unsecured loans: mean default rate of 5.0%, a coefficient of variation of 84.7%. Scope also considered a long-term mean default rate of 5.4% and a coefficient of variation of 80.0% to account for fluctuations through a full economic cycle. The AAA recovery rate is 16.2% and the A recovery rate is 20.5%.

Mortgage secured loans: mean default rate of 10.0%, a coefficient of variation of 95.3%. Scope also considered a long-term default rate of 9.8% and a coefficient of variation of 56.0% to account for fluctuations through a full economic cycle. The AAA recovery rate is 51.1% and the A recovery rate is 63.4%.

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

Sensitivity analysis

Scope tested the resilience of the rating 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 rating 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 mean default rate increases by 50%, or the portfolio’s expected recovery rate decreases by 50%, respectively:

• Class A: sensitivity to default rate assumptions, 0 notches; sensitivity to recovery rates, 0 notches;
• Class B: 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 1.1.1 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 are ‘SME ABS Rating Methodology’ and ‘Methodology for Counterparty Risk in Structured Finance’ which 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 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 received a third-party asset due diligence assessment/asset audit at closing. The external due diligence assessment/asset audit was considered when preparing the rating and it had no impact on the credit rating.
Prior to the issuance of the rating actions, the rated entity was given the opportunity to review the ratings and the principal grounds on which the credit ratings are based. Following that review, the ratings were not amended before being issued.

Regulatory disclosures
These credit ratings are issued by Scope Ratings GmbH.
Lead analyst: Adam Plajner, Senior Analyst
Person responsible for approval of the rating: Antonio Casado, Executive Director
The final ratings were first released by Scope on 3 August 2016. The ratings were last updated on 24 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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