Scope downgrades Class A notes issued by Prosil Acquisition S.A. – Spanish NPL ABS
Scope Ratings GmbH (Scope) has reviewed the performance of Prosil Acquisition S.A., Compartment "Cell Number 5", a static cash securitisation of a portfolio of Spanish NPLs and REO properties originated by different entities in Abanca Group.
The transaction comprises the following instruments:
Class A (ISIN XS1843432078), EUR 146.9m outstanding amount: downgraded to BBSF from BB+SF
Class B (ISIN XS1843431930), EUR 30m outstanding amount: affirmed at CCCSF
Class J (ISIN XS1843431856), EUR 15m outstanding amount: not rated
Class Z (ISIN XS1843431773), EUR 16m outstanding amount: not rated
Scope’s review was based on available payment information and investor and servicer reporting as of June 2021.
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 2021, aggregate gross collections were EUR 59.4m, which represents 47.8% of the original business plan expectations of EUR 124.1m. Around 13% of gross collections 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 (39%), discounted pay-off (‘DPO’) proceeds (30%), loan sale proceeds (17%) and other type of collections (14%). Closed borrowers account for 19.2% of all borrowers.
Around 13.6% of the class A notes’ notional had amortised up to the latest interest payment date (April 2021), as we observe a relatively low conversion rate of gross collections, only partially explained by higher expenses than forecasted in the initial business plan. As a result, the class A notes outstanding balance relative to outstanding GBV has increased to 41.1% from 34.4% at closing.
Interests 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 2021*), the net cumulative collection ratio and the NPV profitability ratio are at 48% and 93%, respectively. Therefore, a class B interest subordination event has occurred and interest on class B are now subordinated to payment of class A principal, resulting in EUR 2.11M of deferred interests as of April 2021.
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 4% lower compared to the amount forecasted at closing.
Reported profitability on closed borrowers stands at c.93%, 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 January 2021, lifetime gross collections have been reviewed downwards (2.8%) 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.f
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 sales1 (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 close to the market value of the related properties, which implies limited discount 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 collections1 (negative): Observed cumulative net collections are reported to be 47.8% of the original business plan expectations through 30 June 2021. 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.
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 43.3% over a weighted average life of 4.7 years. The class B recovery rate of 51.0% was considered over a weighted average life of 4.4 years.
By portfolio segment, Scope assumed a class A gross recovery rate of 45.3% and 2.4% for the secured and unsecured portfolios, respectively. Scope assumed a class B gross recovery rate of 53.4% 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 ratings 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, two notches decrease;
- a one-year recovery lag increase, one notch 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, two notches decrease;
- a one-year recovery lag increase, zero notches.
*This was amended on 6 August 2021 to rectify a typing error. In the original publication, this was “April 2020”.
Rating driver references
1. Transaction documents and reporting (Confidential)
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 1.1incorporating 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.
The methodologies used for these Credit Ratings, (Non-Performing Loan ABS Rating Methodology, 9 September 2020; Methodology for Counterparty Risk in Structured Finance, 13 July 2021; General Structured Finance Rating Methodology, 14 December 2020), are available on https://www.scoperatings.com/#!methodology/list.
The model used for these Credit Ratings 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 Rating: 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 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 due diligence assessment/asset audit at closing. The external due diligence assessment/asset audit 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.
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: Cyrus Mohadjer, Senior Analyst
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The final Credit Ratings were first released by Scope Ratings on 30 July 2019. The Credit Rating were last updated on 31 July 2020.
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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