Scope downgrades class A and class B notes of Prosil Acquisition S.A. – Spanish NPL ABS
Scope Ratings has reviewed the performance of Prosil Acquisition S.A., Compartment "Cell Number 5", a static cash securitisation of a portfolio of Spanish non-performing loans and REO properties originated by different entities in Abanca Group.
The transaction comprises the following instruments:
Class A (ISIN XS1843432078), EUR 156.4m: downgraded to BB+SF from BBB-SF
Class B (ISIN XS1843431930), EUR 30m: downgraded to CCCSF from B-SF
Class J (ISIN XS1843431856), EUR 15m: not rated
Class Z (ISIN XS1843431773), EUR 16m: not rated
Scope’s review considered the latest available payment information, along with servicer reporting as of June 2020.
Prosil Acquisition S.A. is a static cash securitisation of a Spanish non-performing loans (NPLs) portfolio worth around EUR 494.7m by outstanding balance (OB) of NPLs and around EUR 40m by third party appraisal value of real-estate owned properties (REO), actively serviced by Hipoges. The NPL pool consists 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 ratings were first assigned on 30 July 2019 and the legal maturity is in October 2039.
As of 30 June 2020, aggregate gross collections were EUR 31.7m, which represents 54.4% of the original business plan expectations of EUR 58.3m. Around 13% of gross collections (EUR 4.2m) come from open debtors (i.e. debtors for which the recovery process is still ongoing) while the rest stems from closed borrowers or REO properties. Sources of collections are real estate sales (34%), discounted pay-off (‘DPO’) proceeds (33%), loan sale proceeds (22%) and other type of collections (11%). Closed borrowers account for 8.9% of all borrowers.
Around 8.0% of the class A notes’ notional has amortised, a level above Scope’s expectations under a BBB- scenario. As a result, the class A notes outstanding balance relative to outstanding GBV has increased to 38.2% from 34.4% at closing.
Interest on class B are subordinated to payment of class A principal if the net cumulative collection ratio falls below 90% of the servicers’ business plan target or the NPV profitability ratio falls below 90%. This ratio is curable, and once is cured, all accrued and unpaid interest are distributed senior to Class A principal payments.
According to the data provided by the servicer for the last payment date (April 2020), the net cumulative collection ratio and the NPV profitability ratio are at 54% and 94%, respectively. Therefore, a class B interest subordination event has occurred and interest on class B are now subordinated to payment of class A principal.
The rating action is driven by Scope’s updated modelling assumptions, which reflect the current and developing macro-economic factors, as well as the observed and expected performance of the transaction. Scope also compared the transaction’s performance to its own recovery assumptions, in the current macro-economic context, regarding asset resolution timing and recovery estimates developed through transaction-specific observations and benchmarking. Specifically, Scope expects base case lifetime collections (B rating category) to be around 8% lower compared to the amount forecasted at closing.
Cumulative net collections (gross collections net of recovery expenses), amount to EUR 27.6m, equal to 54% of the original business plan’s expectations of EUR 51.0m. Disruptions from COVID-19 have been a clear driver of the underperformance in terms of collections’ timing. However, Scope notes that collections from January through March were already trending lower.
Reported profitability on closed borrowers stands at c.94%, above Scope’s expectations at closing under a BBB- scenario. While the servicing fee structure provides incentives to maintain this positive trend, Scope notes that the number of closed borrowers is still relatively small, and identifies a downside risk on profitability given the challenging macro-economic context.
In the most recent business plan, dated April 2020, lifetime gross collections have been reviewed downwards (2.2%) compared to the initial business plan, with a more backloaded timing on expected recoveries. The adjustments made to the business plan do not impact Scope’s own recovery assumptions, even though we view the reforecast as consistent with the underperformance to date and the envisaged repercussions from the pandemic.
Relevant transaction counterparties are: i) Hipoges Iberia S.L., the special servicer; ii) Elavon Financial Services D.A.C., UK branch, agent bank and principal paying agent; iii) Abanca Corporación Bancaria, S.A. and Citibank Europe plc, Luxembourg Branch, the account bank and account agent iv) JP Morgan AG as interest rate cap providers. All counterparties continue to support the ratings.
Key rating drivers
Profitability on property sales (positive): The special servicer has sold 146 properties on the open market since closing of the transaction, including 128 which were REOs at closing. The weighted average property sale amount is very close to the market value of the related properties, which implies no discount resulting from market value decline or fire-sale strategies, resulting in high profitability on these positions despite the relatively small sample.
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.
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.
Cumulative collections (negative): Observed cumulative net collections are reported to be 54.1% of the original business plan expectations through 30 June 2020. This represents three payment dates since closing. Accordingly, the 90% subordination trigger on Class B interests has been breached.
Challenging legal environment (negative). There is a higher degree of legal uncertainty in Spain compared to other countries in the EU. Recent debtor-friendly legal developments, such as extension of the moratorium on evictions from primary residences and increased protection to consumers around mortgage termination clauses, may result in longer and more costly legal proceedings.
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.
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.
Negative. Servicer performance which falls short of Scope’s collection amounts and timing assumptions could negatively impact the rating.
Negative. If the Covid-19 pandemic lasts longer than expected, the supportive measures taken by the Spanish government may prove insufficient. This could lead to lower collection amounts and delayed recovery timings, both negatively impacting the rating.
Positive. A decrease in legal expenses could positively affect the rating.
Positive. Consistent servicer outperformance in terms of recovery timing and the total amount of collections could positively impact the rating.
Quantitative analysis and assumptions
Scope analysed cash flows, reflecting the transaction’s structural features, to calculate each tranche’s expected loss and weighted average life. Scope analysed the assets to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.
Scope has updated its modelling assumptions to reflect the current performance of the transaction, as well as the current macro-economic context. The class A rating scenario incorporated a gross recovery rate of 41.7% over a weighted average life of 5.2 years. The class B recovery rate of 53.2% was considered over a weighted average life of 4.8 years.
By portfolio segment, Scope assumed a class A gross recovery rate of 41.8% and 2.3% for the secured and unsecured portfolios, respectively. Scope assumed a class B gross recovery rate of 44.2% and 2.7% for the secured and unsecured segments, respectively. Scope captured idiosyncratic risk by applying rating-conditional recovery rate haircuts to the 10 largest borrowers.
Scope tested the resilience of the rating to deviations in expected recovery rates and recovery timing. 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 class A notes change compared to the assigned rating in the event of:
10% haircut to recoveries, three notches decrease;
- a one-year recovery lag increase, two notches decrease.
The following shows how the results for class B notes change compared to the assigned rating in the event of:
10% haircut to recoveries, no impact;
- a one-year recovery lag increase, no impact.
Stress testing was performed by applying rating-adjusted recovery rate assumptions.
Cash flow analysis
Scope performed a cash flow analysis of the transaction using the Scope Cash Flow SF/EL Model Version 1.1. The analysis incorporated recovery rate and timing assumptions. It also took into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The analysis provided an expected loss and an expected weighted average life for the notes.
The methodologies used for this rating were Scope’s ‘Non-Performing Loan ABS Rating Methodology’ published on 3 September 2019 and its ‘Methodology for Counterparty Risk in Structured Finance’ published on 8 July 2020. All documents are available on https://www.scoperatings.com/#!methodology/list.
The model/s used for this ratings 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 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 entities’ agents, third parties.
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 rating 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 at closing. The external due diligence assessment was considered when preparing the rating and it has no impact on the credit rating.
Prior to the issuance of the rating action, the rated entity was 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.
This credit rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Cyrus Mohadjer, Senior Analyst
Person responsible for approval of the rating: David Bergman, Managing Director
The ratings were first released by Scope on 30 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
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