Scope downgrades class B and affirms A issued by FT RMBS Prado IX - Spain RMBS
Scope Ratings GmbH (Scope) has reviewed the performance of the notes issued by FT RMBS Prado IX and has taken the following rating actions:
Class A (ES0305608004), EUR 397.1m outstanding: affirmed at AAASF
Class B (ES0305608012), EUR 24.4m outstanding: downgraded to BBB+SF from A-SF
Class C (ES0305608020), EUR 39.0m outstanding: not rated
Fondo de Titulización RMBS Prado IX is a static cash securitisation consisting of prime residential mortgage loans originated by Unión de Créditos Inmobiliarios, S.A., Establecimiento Financiero de Crédito (UCI). The portfolio consists of first-lien mortgages on residential properties provided to borrowers’ resident in Spain.
The transaction closed on 21 October 2021 and the final legal maturity will be in June 2055. As of last payment date in June 2022, around 9 months since the closing date, the notes’ outstanding nominal balance was EUR 460.5m (EUR 488.0m at closing).
As of payment date (June 2022), the rated notes credit support has increased slightly. The small positive increase on the credit support on the rated notes was not enough to offset the adverse impact of the significant rise since closing date on the modelled current 3-month Euribor forward curve. As result of the rising interest rate the modelled excess spread, which was low at closing, has been further reduced.
The transaction benefits from an interest rate swap hedging agreement, with a predefined notional balance combined with the transaction’s structural caps for the class A, B and C notes, which only partially hedges the fixed-floating interest rate risk. The notional balance of the interest rate swap corresponds to the expected evolution of the fixed-rate assets including the mixed-rate loans still on a fixed-rate period.
As of June 2022, the transaction default and recovery performance have been in line with Scope’s initial expectations. No collateral performance triggers related to the turbo amortisation event and the class B interest deferral event have ever been breached and were well below their trigger levels due to satisfactory portfolio performance. As of the payment date the portfolio cumulative default ratio was at 0%, below the 1% trigger level for both the turbo amortisation event and the class B interest deferral event.
Counterparty risk does not constrain the ratings. The Issuer account bank holder Banco Santander S.A. and the interest rate swap counterparty BNP Paribas still hold the ratings required to allow the highest possible rating on the transaction. The strong credit profiles of Banco Santander SA and BNP Paribas SA, combined with appropriate counterparty downgrade and replacement mechanisms, is effective at mitigating the transaction’s counterparty risk.
Key rating drivers
Increased credit enhancement (positive)1,2. As a result of portfolio repayment and sequential notes repayment, credit support on the rated notes has increased slightly. Class A credit enhancement has increased to 15.8% from 15.0% at closing, while that for the class B have increased to 10.5% from 10.0% over the same period.
Satisfactory performance (positive)1. As of June 2022, delinquencies more than 180 days past due were low (4 bp of the total pool principal balance outstanding), no defaults were reported since closing, and no loans were in moratorium. The transaction default performance is in line with our expectations.
Reduced limited excess spread (negative)1. The already low level of excess spread was further reduced due to the recent increase observed on the three-month Euribor curve. Scope’s modelling incorporated the most recent three-month Euribor forward curve. The rise in interest rates and consequent reduction in the transaction’s available excess spread was only slightly offset by the minor increase on the notes’ credit support thanks to the sequential repayment profile.
Macroeconomic uncertainty (negative)2, 3. The energy crisis, geopolitical tensions and record-high inflation highlight the very uncertain macro-economic backdrop. Scope expects growth to slow to 4.1% in 2022 and 2% in 2023, from 5.1% in 2021. Consequently, the senior note remains exposed to back-loaded defaults, a notable downside risk because the transaction’s pro-rata amortisation is preventing credit enhancement build-up. This risk is partially offset by collateral performance triggers that switch amortisation from pro-rata to fully sequential.
Positive. Significantly better performance than expected, e.g. significantly higher recovery rates than expected or a stabilisation of interest rates.
Negative. A worsening of the geopolitical tensions in Central and Eastern Europe as well as high sustained inflation may negatively impact the Spanish economy, asset performance and the ratings.
Quantitative analysis and assumptions
Scope used a cash flow model to analyse the transaction and applied a statistical distribution of defaults when modelling the granular collateral pool. The key assumptions derived were then applied to the cash flow analysis of the transaction over its amortisation period.
Based on the pool composition as of June 2022, Scope established a mean default rate of 5.8% and a coefficient of variation of 88.9% for the remaining pool over a weighted average life of 13.9 years. Scope maintained its closing base case recovery rate of 75%. The rating-conditional recovery rates were therefore 75.0% for B, 69.0% for BB, 63.0% for BBB, 57.0% for A, 51.0% for AA and 45.0% for AAA.
Scope also tested the structure considering a 15% high CPR and 0% low CPR.
Scope tested the resilience of the ratings to deviations in the main input parameters: the mean default rate and the portfolio recovery rate. 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. The following shows how the results for each rated tranche change compared to the assigned ratings when the assumed mean default rate increases by 50%, or the portfolio’s expected recovery rate decreases by 50%, respectively:
Class A: sensitivity to mean default rate, three notches; sensitivity to recovery rate, two notches
Class B: sensitivity to mean default rate, three notches; sensitivity to recovery rate, five notches
Rating driver references
1. Investor reports
2. Transaction documentation
3. Scope revised Outlook on Spain’s A- rating to Stable
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 Rating’s 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.
The methodologies used for these Credit Ratings, (General Structured Finance Rating Methodology, 17 December 2021; Counterparty Risk Methodology, 14 July 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings are (Scope Cash Flow SF EL Model Version 1.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 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/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.
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: Miguel Barata, Director
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The final Credit Ratings were first released by Scope Ratings on 21 October 2021.
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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