Rating action

Scope Ratings has reviewed the performance of the SME Initiative Uncapped Guarantee Instruments (SIUGI) Senior Risk Cover and Upper Mezzanine Risk Cover, issued under the European Investment Bank Group’s Spanish SME initiative.

The rating actions are as follows:

SIUGI Senior Risk Cover, EUR 608.3m*: affirm at AAA_SF

SIUGI Upper Mezzanine Risk Cover, EUR 124.3m*: upgrade to AAASF, from A+_SF

*Outstanding amounts reflect amortisation and defaults as of 30 September 2019 and risk cover sizes, considering a fully ramped portfolio.

The rating actions incorporate portfolio updates provided by the European Investment Bank Group up to the latest reporting date, 30 September 2019 – please also see the most recent performance report - LINK.

Transaction overview

The SME Initiative Uncapped Guarantee Instruments (SIUGI) for Spain is a bespoke European Union sponsored risk transfer transaction of Spanish SME credit rights (i.e. loans, revolving lines and financial leasing) originated by eight Spanish banks and managed by the EIF. The EIF has entered into bilateral guarantees with each participating bank. The risk takers in the transaction are the European Investment Bank (EIB), the EIF, the EU, and the Kingdom of Spain.

The banks originating the credit rights and benefiting from this initiative are Banco Cooperativo Español, Banco Sabadell, Banco Santander, Bankia, Bankinter, CaixaBank, Ibercaja and Liberbank.

As of the reporting date, the reference portfolio was 83.4% ramped up.

Scope did not assign ratings to the Middle Mezzanine Risk Cover, the Lower Mezzanine Risk Cover, or the First Loss Piece in the transaction. The transaction’s maturity is 31 December 2033.

For further information, please consult the new issue ratings report - LINK - available on www.scoperatings.com.

Rating rationale

The rating actions are driven by an increase in the instruments’ credit enhancement as a result of amortisation and the solid performance of the reference portfolio. This is illustrated by the 90-days-overdue assets in the portfolio which account for only 0.57% of ramped and outstanding portfolio balances; the cumulative default rate of 2.90% of the ramped-up portfolio’s original balance; and amortisation at 56.3%, as of the reporting date. Credit enhancement available to the Senior Risk Cover and the Upper Mezzanine Risk Cover has increased to 56.7% and 47.9%, respectively, compared with 47.0% and 39.7% at last the monitoring date. The rating actions also reflect the evolution of the reference portfolio, characterised by EUR 4,606.9m of assigned assets, and 16.6% yet to be ramped up.

Scope considers the transaction’s average asset quality to be weaker than that of traditional Spanish cash SME securitisations. We have assumed that the credit quality of the fully ramped portfolio will be commensurate with a B- rating. This reflects Scope’s view that the eight originators have a greater incentive to assign higher-risk assets to the reference portfolio. The transaction supports lending towards obligor categories whose risk profiles would typically limit banks’ lending capacity.

The upgrades reflect the instruments’ expected resilience to the distressed Spanish macroeconomic environment caused by the COVID-19 pandemic, driven by the substantial increase in the instruments’ credit enhancement.

Key rating drivers

Credit enhancement (positive). The Senior Risk Cover and the Upper Mezzanine Risk Cover benefit from a credit enhancement of 56.7% and 47.9%, respectively. The levels support the ratings in the light of the reference assets’ risk profile.

Alignment of interests (positive). Each originator must maintain a minimum economic interest of 20% in each individual credit right assigned to the SME initiative. This mitigates moral hazard and adverse origination practices. Claims on recoveries are enforceable beyond the maturity of the transaction, as part of the ‘survival rights’.

Operational supervision (positive). The EIF and the risk-takers benefit from significant contractual supervision rights. This includes the ability to scrutinise credit policy applications and directly monitor originators’ operations, which mitigates the risk of originators deviating from standard procedures.

Spanish economy (negative). The Spanish economy faces a deep recession in 2020, with a likely higher impact on small SMEs, fuelled by the COVID-19 pandemic. Small and micro SMEs are particularly vulnerable to this distressed economic environment, despite governmental and banking sector liquidity support measures, as well as the expected economic recovery towards 2021.

Asset credit quality (negative). Scope assumes the average credit quality of the fully ramped portfolio to be commensurate with B-, reflected in the high lifetime default rate and default volatility assumptions.

Flexible eligibility criteria and originator incentives (negative). The asset eligibility criteria offer the originators substantial flexibility in selecting higher-risk assets. Originators also have incentives to include higher-yielding (high expected loss) assets in order to amortise the guarantee cost paid to the EIF.

Partially ramped portfolio (negative). A material proportion of the underlying portfolio has still not been ramped-up, yet. This exposes the transaction to uncertainties regarding the portfolio’s ultimate asset characteristics. This risk is only partially mitigated by asset eligibility criteria and the short remaining time to the end of the ramp-up period.

Rating-change drivers

Negative. Worse-than-expected performance of the assets, such as a material increase in default rates, could negatively impact the ratings.

Negative. A longer than expected lasting COVID-19 pandemic may overwhelm the supportive measures by the government and increase corporate defaults to unprecedented levels, upon which we may revisit our default and recovery assumptions.

COVID-19 situation in Spain

Scope expects only a marginal impact for the rated notes from the COVID-19 pandemic, despite the severe impact it is expected to have on the Spanish economy. High credit enhancement, reduced exposure to the most-impacted sectors and the governmental as well as supranational support measures largely offset the high exposure of the transaction’s reference portfolio to small and micro businesses.

Scope expects a severe GDP drop in 2020, fuelled by the COVID-19 pandemic. In particular the high share of economic activity in the severely impacted tourism and entertainment sector will drive the GDP decline and increase in unemployment. Assuming a gradual economic recovery towards 2021 may off-set the losses of 2020. The comparably stronger financial position of the banking sector compared to before the great financial crisis allow payment holiday measures and term renegotiations, which will partially mitigate the crisis impact on corporate defaults. However, smaller SMEs are rather facing solvency than liquidity issues, which may impair the effectiveness of the support measures.

Quantitative analysis and assumptions

Scope’s analysis incorporates the updated originators’ shares in the reference portfolio and the updated ramp-up status of the portfolio, now at 83.4%. Scope took into account the delinquent assets (more than 15 days in arrears) and defaulted assets in the reference portfolio to date.
Scope analysed the probability distribution of portfolio default rates, assuming an inverse Gaussian distribution, as well as the risk covers' release and loss-allocation mechanism. The analysis provided the expected loss and expected weighted average life of each rated tranche. Scope considered changes in the reference portfolio’s composition and the proportion of non-performing and defaulted assets.

Scope assumed a point-in-time mean default rate of 18.4% and a coefficient of variation of 41.4%. Scope also considered a long-term reference, assuming a mean default rate of 8.2% with a coefficient of variation of 76.3%. Scope’s rating-conditional asset recovery rate assumptions were 21.3% for the Senior Risk Cover and the Upper Mezzanine Risk Cover.

Scope updated its portfolio assumptions for assets in the reference portfolio and for the transaction amendments.

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 quantitative results for each rated instrument change compared to the assigned rating when the portfolio’s mean default rate increases by 50%, or the portfolio’s expected recovery rate decreases by 50%, respectively:

• Senior Risk Cover: sensitivity to mean default rate assumptions, zero notches; sensitivity to recovery rates, zero notches;
   
• Upper Mezzanine Risk Cover: sensitivity to mean default rate assumptions, zero notches; sensitivity to recovery rates, zero notches.

Rating driver references
1. EIB internal reporting and originators’ internal reporting
2. Scope’s economic research

Stress testing
Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope implemented the risk cover release and loss allocation mechanism for this transaction with the use of Scope Cash Flow SF EL Model Version 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 this rating(s) and/or rating outlook(s): SME ABS Rating Methodology (9 April 2019) and Methodology for Counterparty Risk in Structured Finance (24 July 2019) are available on https://www.scoperatings.com/#!methodology/list.
The model used for this rating(s) and/or rating outlook(s) Scope Cash Flow SF EL Model Version 1.1 is available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

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 not received a third-party asset due diligence assessment/asset audit, due to ramp-up transaction. However, Scope reviewed the asset selection process and the monitoring systems before closing. The external due diligence assessment/asset audit/internal analysis 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Sebastian Dietzsch, Director
Person responsible for approval of the rating: David Bergman, Managing Director
The ratings/outlooks were first released by Scope on 8 May 2017. The ratings/outlooks were last updated on 20 August 2018.

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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