Rating action

Scope Ratings GmbH (Scope) 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 0.0m^*: withdrawal from AAA_SF

SIUGI Upper Mezzanine Risk Cover, EUR 6.5m^*: affirmation at AAA_SF

*Outstanding amounts reflect amortisation and defaults as of 30 December 2020.

The rating actions incorporate the update of the outstanding Risk Cover balances as of 30 December 2020 provided by the European Investment Bank Group.

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.

The Senior Risk Cover was fully released as the reference portfolio has amortised accordingly.

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 rating report available on www.scoperatings.com.

Rating rationale

We withdraw the rating on the Senior Risk Cover due to a full release.

The rating action on the Upper Mezzanine Risk Cover reflects the increase of its credit enhancement to 98.7% as a result of amortisation and the solid performance of the reference portfolio, as well as the expected full release without loss allocation in early 2021.

Loss claims for defaulted or lost amounts in the reference portfolio accumulated to only 3.88% to date, which is better than expected.

Key rating drivers

Credit enhancement (positive)¹. The Upper Mezzanine Risk Cover benefits from 98.7% credit enhancement from subordination.

Solid asset performance (positive)¹. To date claimed losses only accumulated to 3.88% of the total reference balance. The full repayment of the Upper Mezzanine Risk Cover in Q1 2021 is highly likely.

Alignment of interests (positive)¹. 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)¹. 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.

Rating-change drivers

Negative: A severe macroeconomic shock causing a large spike in credit defaults coupled with significantly lower than expected recoveries could have a negative effect on the rating.

Quantitative analysis and assumptions

Scope expects a full release of the remaining EUR 6.5m Upper Mezzanine Risk Cover in early 2021 without loss allocation.

The analysis considered the low outstanding balance of the rated instrument versus the outstanding non-defaulted balance of the reference portfolio, EUR 1,013.3m, accounting for the 50% guarantee rate.

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:

The Upper Mezzanine Risk Cover shows no sensitivity to the outlined scenarios.

Rating driver references
1. EIB internal reporting and originators’ internal reporting (confidential)

Stress testing
No modelling update was undertaken for this review. At previous monitoring, stress testing was performed by applying Credit-Rating-adjusted recovery rate assumptions.

Cash flow analysis
No update of the cash flow analysis was undertaken. For previous monitoring we 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 these Credit Ratings, (General Structured Finance Rating Methodology,14 December 2020; SME ABS Rating Methodology, 26 May 2020; Methodology for Counterparty Risk in Structured Finance, 8 July 2020), are available on https://www.scoperatings.com/#!methodology/list.
The model used for this Credit Rating is Scope Cash Flow SF EL Model Version 1.1, available in Scope Ratings’ list of models, published under https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
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 Entity, 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 the 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 not received a third-party asset due diligence assessment/asset audit. However, Scope reviewed the asset selection process and the monitoring systems before initial rating assignment. The external due diligence assessment/asset audit/internal analysis was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were 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: Sebastian Dietzsch, Director
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 8 May 2017. The Credit Rating were last updated on 19 May 2020.

Potential conflicts
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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