Rating action

Scope Ratings GmbH (Scope) has today assigned final ratings to the notes issued by Retiro Mortgage Securities DAC, a cash securitisation of a EUR 396.2m portfolio of REO assets (by indexed property value) and a EUR 678.4m portfolio of Spanish NPLs originated by Banco Sabadell, Bankia, Caja De Ahorros De Valencia, Castellon Y Alicante (Bancaja), Caja De Ahorros Layetana, Caja De Ahorros La Rioja, Caixa D´Estalvis Laietana, and Deutsche Bank.

Class A1 (ISIN: XS2306848479), EUR 260,000,000: rated BBB+_SF

Class A2 (ISIN: XS2306849287), EUR 77,000,000: rated BBB-_SF

Class B (ISIN: XS2306849956), EUR 34,000,000: rated B-_SF

Class C (ISIN: XS2306850459), EUR 15,000,000: rated CCC_SF

Class D1 (ISIN: XS2306856571), EUR 10,000,000: not rated

Class D2 (ISIN: XS2306857207), EUR 10,000,000 : not rated

Class D3 (ISIN: XS2306858197), EUR10,000,000: not rated

Class E (ISIN: N/A), EUR 54,000,000: not rated

The latest information on the rating, including rating reports and related methodologies, is available on this LINK

Transaction overview

The transaction is a static cash securitisation of four NPL and REO sub-portfolios: Wind, TAG, Normandia and Tambo, acquired between 2015-2017 by respective mortgage lenders and propcos.

The total pool value, defined as the total current balance of loans plus the total underwritten valuation amount of the REO assets in the portfolio, stands at EUR 1.35bn. This comprises of: (i) a 396.2m portfolio of REO assets by indexed property value, and (ii) a EUR 678.4m portfolio of Spanish NPLs.

The portfolio is composed of senior secured (94.5% of current balance^*) and junior secured (4.5% of current balance^*) loans, and REO assets. Properties are mainly residential (77.8% of indexed property value^*) and concentrated in Valencia (27.1% of indexed property value), Catalonia (26.3%) and Andalucía (14.2%). Most borrowers are corporate or small and medium enterprises (66.9% of current balance).

The portfolio is serviced by Redwood MS Limited (as master servicer), VicAsset Holdings, LLC. (as master servicer and REO servicer) Redwood Real Estate Spain S.L.U (as REO servicer), and RTA Management Gestion Integral de Activos, S.L. (as loan servicer).

The transaction is not a true sale of receivables to the issuer and implements a vertical structure for the management of each sub-portfolio, with a mortgage lender, an SPV with credit rights over the loans and a respective propco, with security rights over the REO assets.

To ensure flow of transaction-related funds between various SPVs – the issuer and various mortgage lenders and the mortgage lenders and their respective propcos – shall enter various loan agreements at closing. Under these agreements, at the closing date, the issuer shall make advances to the mortgage lenders (using note proceeds) and the mortgage lenders will use these funds to make advances to the respective propcos. Portfolio collections, as well as principal and interest payments under each mortgage lender/Propco loan agreement are then used by the mortgage lenders to repay the principal and interest due on the issuer/mortgage lender loans. These proceeds are ultimately used by the issuer to repay the notes.

The transaction’s structure comprises eight tranches of sequential, principal-amortising notes and features liquidity support for the four tranches of rated notes. For class A1 and class A2 notes, the amortising liquidity reserve is equal to 5.0% of the outstanding class A1 and class A2 principal. Class B and Class C reserve funds are funded with 7.5% and 10.5% of the respective tranche’s outstanding principal amounts at closing. The issuer will also enter an interest rate cap agreement to hedge interest rate risk. Upon the maturity of the cap agreement, the terms of rated notes imply a cap on the payable base rate.

Rating rationale

The rating is primarily driven by the expected recovery amounts and timing of collections from the non-performing loans and REO assets portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics as well as Scope’s economic outlook for Spain and its assessment of the REO and special servicers’ capabilities. The rating is supported by the structural protection provided to the notes, the liquidity reserves available to the noteholders and the interest rate hedging agreement. The rating also addresses the issuer’s exposure to key counterparties, with the assessment based on counterparty substitution provisions in the transaction and, when available, Scope’s ratings or other public ratings on the counterparties.

Key rating drivers

Loan type (positive)^1,*. The loan portfolio is mainly composed of senior secured loans (94.5% of CB).

Property type (positive)^1,*. The majority of the REO and assets are residential (77.8% of indexed property value), which are generally more liquid than non-residential properties.

Strong liquidity support (positive)². The structure features liquidity protection for all rated notes in the form of a liquidity reserve for the class A1 and A2 notes and a reserve fund for class B and C notes.

Strong interest rate protection (positive)². The structure features an interest rate cap agreement, effective from the closing date until (and including) the note payment date in April 2026, which provides an interest risk hedge for all rated notes. Together with a coupon cap embedded in the terms and conditions of the rated notes (effective upon the interest rate cap agreement’s maturity), the payable base rate is capped through the life of the notes.

Property concentration in relatively liquid areas (positive)^1,*. Based on our real estate liquidity analysis, most of the portfolio (86.9% of indexed property value) is concentrated in markets with average or above-average liquidity such as urban and suburban centres. This may result in lower liquidation times than for comparable portfolios.

Portfolio onboarding activities already completed (positive)². The sub-portfolios have been serviced by their respective special and master servicers for between 1-4 years as of the closing date. Therefore, there is no onboarding or ramp-up period.

Dated valuations (negative)¹. A significant share of the assets were valued before 2018 (37.7% of unindexed property value) and indexed as of the cut-off date. Such valuations may not accurately reflect current values.

Borrower concentration (negative)¹. The top 10 borrowers in the portfolio represent 16.4% of the CB. This is above the average for comparable portfolios we have analysed.

Deferred interest earns penalty interest (negative)². Both margin interest and additional note payments earn interest on deferred interest. However, as additional note payments (including penalty interest) are deferred until the respective tranche is fully amortised, the weighted average life of the class B and C notes is higher than it otherwise would be, as payments to these tranches rank junior to additional note payments made in relation to the more senior tranches.

No back-up servicer or BUS facilitator (negative)². No back-up servicer or BUS facilitator is in place to assist in the event of a replacement of the servicer or master servicer. However, strong liquidity and the master servicers’ undertaking to assist in appointing a replacement mitigate the risk of servicer disruption.

Relatively weak representations and warranties (negative)². Warranties provided by the mortgage lenders are weaker than EU market standards.

Concentration in Catalonia and Valencian Community (negative)¹. Most assets are concentrated in Catalonia and Valencian Community (53.4% of indexed property value), where recent legislative developments have favoured borrowers and occupants, such as those at risk of residential exclusion – particularly in the case of residential assets. This may result in delayed liquidation and/or additional costs. Similar legal developments in other autonomous communities may also impact the portfolio.

Rating-change drivers

Servicer outperformance on recovery timing (upside). The pandemic led to a slowdown of court activity. If courts advance on legal proceeding backlogs faster than expected, an outperformance on recovery timing could occur. This could positively impact the rating.

Higher than expected expenses (downside). Asset-carry costs, such as property taxes, and asset management fees depend on the liquidation timing of the underlying assets. Therefore, these costs could substantially increase in a materially illiquid market or due to unfavourable legal developments. This could negatively impact the rating.

Long-lasting pandemic induced crisis (downside). Recovery rates are generally highly dependent on the macroeconomic climate. After a GDP contraction of 11% in 2020, our baseline scenario for Spain foresees a rebound with 6% growth in 2021. If the current crisis lasts beyond our baseline scenario, however, liquidity conditions could deteriorate, reducing servicer performance on collection volumes. This could negatively 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. As the first step, Scope analysed the assets to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.

Scope performed a specific analysis for recoveries, using different approaches for the secured and unsecured segments of the portfolios. Both for secured loans and REO assets, collections were mainly based on the most recent property appraisal values, which were stressed for the servicers’ appraisal methodologies and liquidity and market value risks. For secured loans, recovery timing assumptions were derived using line-by-line asset information detailing the type of legal proceedings, the court in which the proceedings are ongoing, and the stage of the proceeding as of the cut-off date. Furthermore, we apply a line-by-line approach to derive time-to-sell assumptions for all collateral and REO assets, considering the property type and market liquidity. Scope also considered historical data provided by the servicer. For unsecured (junior secured) loans, Scope considered the servicers’ capabilities when calibrating lifetime recoveries and benchmarked this against historical data from other European jurisdictions.

For analysis of the class A1 notes, Scope assumed a gross recovery rate of 38.5% (as a % of pool value) with a weighted average life of 3.3 years. By portfolio segment, Scope assumed a gross recovery rate of 27.2% for secured loans and 0.4% for unsecured and junior secured loans. For the REO portfolio, we assumed gross sales proceeds amounting to 61.4% of underwritten valuation amounts of the properties. Scope has applied an upward indexation adjustment of 8.75% and an average combined security value haircut of 39.4% to underwritten valuation amounts, which consists of i) an average fire-sale discount (including valuation type haircuts) of 22.2% to security values, reflecting liquidity or marketability risks; and ii) property price decline stresses (28.4% on average), reflecting Scope’s view of downside market volatility risk.

Scope’s analysis considered the servicers’ fee structure and legal expenses at around 11.7% of lifetime gross collections. Scope captured single asset exposure risks by applying a recovery rate haircut of 16.4% to the 10 largest borrowers in analysis of the class A1 notes.

Sensitivity analysis

Scope tested the resilience of the rating against deviations in the main input parameters: the portfolio recovery-rate and the portfolio 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.

For class A1, 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%, zero notches.
   
• an increase in the recovery lag by one year, zero notches.

For class A2, 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%, one notch.
   
• an increase in the recovery lag by one year, zero notches.

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%, zero notches.
   
• an increase in the recovery lag by one year, zero notches.

For class C, 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%, zero notches.
   
• an increase in the recovery lag by one year, zero notches.

* Based on Scope’s calculations.

Rating driver references
1. Loan-by-loan data tape of the securitised pool (confidential)
2. Transaction documents (confidential)

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

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings' 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 these Credit Ratings are the General Structured Finance Rating Methodology (14 December 2020), Non-Performing Loan ABS Rating Methodology (9 September 2020) and the Methodology for Counterparty Risk in Structured Finance (8 July 2020), available on https://www.scoperatings.com/#!methodology/list..
The model used for these Credit rating is Cash Flow Model v1.1. is available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit 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 Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entities’ Related Third Parties, third parties and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the rated entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset audit. The external asset audit was considered when preparing the Credit Ratings and it has no impact on the Credit Rating. Prior to the issuance of the Credit Rating, 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 Credit Rating was not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Chirag Shekhar, Analyst.
Person responsible for approval of the Creidt Ratings: David Bergman, Managing Director.
The final Credit Ratings were first released by Scope Ratings on 31 March 2021.

Potential conflicts¹
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings. Scope Ratings provided the following Ancillary Service(s) to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Credit Estimate.

1. Editor's note: This section was amended on 23 December 2022. On the publication date of 31 March 2021, this section originally stated: "See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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