Rating action

The rating action is as follows

Notes (ISIN ES0305566012), up to EUR 150,000,000: rated A+_SF

Transaction overview

Aquisgran is a revolving cash securitisation of a loan portfolio ramping up to EUR 150m. The loans are being underwritten by the SGRs and granted by Aquisgran Finance to Spanish small- and medium enterprises (SMEs) and self-employed borrowers. Each underwritten loan is 100% guaranteed by the underwriting Sociedad de Garantía Recíproca (SGR) and by a 75% counter guaranteed by the Compañía Española de Reafianzamiento, S.A. (CERSA). SGRs are regional non-profit financial entities, subject to the control and regulation of the Bank of Spain which aim to promote access to finance for SMEs and self-employed.

The notes benefit from credit enhancement and liquidity via a cash reserve fully funded by the SGRs. The reserve is equal to 17.5% of the notes.

Aquisgran Finance will be the servicer and will outsource most servicing activities to sub-servicer Copernicus.

Rating rationale

The rating reflects i) the legal and financial structure of the transaction; ii) the expected quality of the revolving portfolio, in the context of the challenges faced by the Spanish economy; iii) the underwriting experience, incentives and credit quality of the SGRs; iv) CERSA's credit quality, closely linked to that of the Spanish sovereign; and v) the exposure to the money-handling agents.

The rating is mainly supported by various layers of credit enhancement, provided by a) a 17.5% cash reserve funded by the SGRs, b) a first-demand, irrevocable and unconditional guarantee provided on a loan-by-loan basis by the respective SGR underwriter, and c) an up to 75% counter-guarantee provided by CERSA. Given the support of respective regions to the SGRs’ activities and the links between the national government and CERSA, we believe that their credit quality is closely linked.

The rating is mainly constrained by the uncertainty regarding the portfolio’s ultimate credit quality, considering a) potential negative portfolio composition migration during the ramp up and revolving period, b) the unproven origination platform provided by the SGRs.

Banco Santander performs the main money-handling roles of account bank and paying agent. The rating accounts for the counterparty risk exposure to the bank as well as its replacement in various roles. We have assessed the bank’s credit quality based on the credit rating maintained by Scope.

Key rating drivers

Two layers of loan guarantees (positive)¹. The SGRs provide a 100% first-demand, irrevocable and unconditional guarantee against loan losses. CERSA provides a counter-guarantee of up to 75% executed, subject to certain conditions, if an SGR fails to fulfil its obligations under the loan guarantee.

Cash reserve (positive)¹. The target cash reserve is 17.5% of the notes and provides both liquidity and credit protection. The participating SGRs are responsible for funding the reserve, which creates a strong alignment of interest with the noteholders.

Sovereign and regional support (positive)¹. The respective regions in Spain support the SGRs’ activities and CERSA has strong links to the national government. The Bank of Spain also controls and regulates the SGRs.

Alignment of interest (positive)¹. Their political nature and social goal of supporting local economies reinforces the strong incentives of the SGRs (and of CERSA) to respect their contractual obligations diligently (ESG factor).

Portfolio ramp-up and replenishment (negative)¹. The final portfolio composition is uncertain due to the ramp-up period from closing and a further revolving period until June 2024, potentially extendable until June 2030. Single-asset and portfolio-level eligibility criteria shape the portfolio’s risk profile.

Unproven origination platform (negative)¹. The origination and underwriting processes of the SGRs and Aquisgran Finance are new for the involved parties and may entail operational and execution risks. As a mitigant, SGRs are committed to repurchasing any exposures found not to comply with eligibility criteria.

Borrower selection (negative)¹. The purpose of the securitised loans is to improve the borrowers’ access to credit, which would otherwise not be available to them. The social nature of the transactions could lead to a below average credit quality of the borrowers, relative to borrowers within the standard banking channel (ESG factor).

One or more key drivers of the credit rating action are considered an ESG factor. 

Rating-change drivers

Positive. Stronger-than-expected characteristics of the selected loans compared to the eligibility criteria may positively impact the rating.

Negative. Weaker-than-expected economic conditions would negatively impact the ratings.

Negative. A severe downgrade of the rating of Spain or of several regions would lead to a greater uncertainty regarding the likelihood of repayments under the guarantees and counter-guarantees. Such uncertainty would negatively affect the ratings.

Quantitative analysis and assumptions

Scope considered a sample portfolio that conservatively represents the expected portfolio, based on eligibility criteria during the ramp-up and revolving periods. Scope expects the portfolio to be below an effective number of 500. Therefore, in accordance with the General Structured Finance Rating Methodology, Scope derived a default distribution for the sample portfolio using a Monte Carlo simulation. For each loan in the sample portfolio, Scope assumed i) a specific default probability; ii) a specific recovery value upon default; and iii) asset correlations among the loans.

Scope assumed the default probability for each loan in the sample portfolio aligned with a B rating. The assumed pair-wise correlation ranges between 7% and 37%, depending the borrowers’ industry and regional exposures. The resulting default distribution for the sample portfolio has a mean default rate of 22.4% and an implicit coefficient of variation of 48% over a weighted average portfolio life of 5.4 years.

Scope assumed the following recovery scenarios: i) 100% contractual recovery if none of the SGRs default, ii) 70% contractual recovery rate in case of insolvency of the relevant SGR, and iii) 27% base case recovery rate in case of CERSA insolvency.

Scope used the resulting default rate distribution, assumed recovery rates and default timings to project cash flows from the portfolio and to determine the expected life and expected loss for each rated note class. The results reflect the transaction’s amortisation mechanisms as well as the credit enhancement of the respective notes.

Scope assumed a portfolio yield of 5.4%, based on portfolio eligibility criteria, which requires 0.4% of portfolio excess spread over the notes’ coupon.

Sensitivity analysis

Scope tested the resilience of the credit 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 credit rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the results would change compared to the assigned ratings in the event of: i) an increase in the mean default rate by 50%; and ii) a reduction in the recovery rate by 50%, respectively:

• Sensitivity to default rate, two notches;
   
• sensitivity to recovery rate, zero notches

 Rating driver references
1. Issuer / instrument documentation and supporting material (Confidential)

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like defaults and Credit-Rating-adjusted recoveries, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.

Cash flow analysis
Scope Ratings primarily analysed the distribution of portfolio losses and its impact on the rated instruments, with the use of Scope Ratings’ Portfolio Model Version 1.0.
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 relevant asset assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for this Credit Rating, (General Structured Finance Rating Methodology, 25 January 2023; SME ABS Rating Methodology, 16 May 2022; Counterparty Risk Methodology, 14 July 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The models used for this Credit Rating are (Cash Flow SF EL Model Version 1.1; Portfolio Model Version 1.0), 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 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 the Credit Rating 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. Scope Ratings has performed its own analysis of the data quality, based on information received from the Rated Entity or Related Third Parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The internal analysis was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit 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
The Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Olivier Toutain, Executive Director
Person responsible for approval of the Credit Rating: Antonio Casado, Executive Director
The Credit Rating was first released by Scope Ratings on 8 February 2023.

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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