Rating action

Scope Ratings GmbH (Scope) has performed the following rating actions:

• Class A (ISIN ES0305545008), EUR 307.6m outstanding: affirmed at AAA_SF
   
• Class Z (ISIN ES0305545016), EUR 50.0m outstanding: upgraded to AA_SF from AA-_SF
   
• Class B (ISIN ES0305545024), EUR 26.4m outstanding: affirmed at BBB+_SF
   
• Class C (ISIN ES0305545032), EUR 21.6m outstanding: not rated

Transaction overview

The transaction is a Spanish consumer RMBS securitisation issued in May 2021. A detailed description of the transaction’s features and analytical assumptions at closing can be found in the rating report available at Scope’s website.

As of the reporting cut-off date on 07 December 2022, the underlying portfolio of assets has an expected remaining weighted average life (assuming zero defaults and prepayments) of around 13.1 years and the pool factor stands at 0.84. Credit enhancement has evolved: with regards to the class A, Z and B notes, it has increased to respectively 26.2%, 13.8% and 7.3% from 22.4%, 12.0% and 6.5% at closing.

The amortising reserve fund is at 100% of its target level, equivalent to 2% of the outstanding portfolio balance.

On the latest interest payment date, excess spread equalled around 0.9% (measured as the realised portfolio yield minus the weighted average cost of the rated notes minus senior expenses, annualised).

The issuer remains primarily exposed to the following counterparties: Unión de Créditos Inmobiliarios, S.A., Establecimiento Financiero de Crédito as originator and servicer, Banco Santander, S.A. as issuer account bank, BNP Paribas Securities Services Sucursal en Espana as issuer paying agent account bank and BNP Paribas S.A. as cap hedging counterparty.

Rating rationale

The review addressed i) the observed performance of the collateral as of the review cut-off date; ii) Scope’s forward-looking performance assumptions in the context of the expected macro-economic environment over the transaction’s remaining life; iii) the transaction’s updated asset and liability structure; and iv) the issuer’s exposure to key transaction parties.

Scope’s main analytical conclusions are:

Observed collateral performance¹. Overall, the portfolio has performed in line with Scope’s expectations at closing. The following key metrics as of the reporting cut-off date reflect the good overall portfolio performance: the cumulative default rate at 0.04% and the 90 days-past-due dynamic delinquency rate at 0.2%.

Expected collateral performance^1,3. Scope estimated the portfolio’s remaining lifetime default rates through an inverse Gaussian distribution. The mean parameter of the distribution was adjusted to 5.6% from 6.0% at closing date, which addresses the expected impact of portfolio amortisation against the backdrop of positive borrower performance to date. Scope has also adjusted the coefficient of variation parameter distribution to 91.5% from 85.0% at closing to account for the lower mean base. Other asset assumptions, including on the recovery and prepayment rates, remain unchanged.

Notes amortisation^1,2. The updated capital structure is positive for the rated class A, Z and B notes. The realised deleveraging of the capital structure reflects the sequential notes’ amortisation in accordance with the transaction waterfall.

Available excess spread¹. Realised cumulative defaults since closing have been fully provisioned for with available excess spread. Available excess spread could decrease, for instance, from higher servicing fees upon a servicer termination event, increased delinquencies or the concentration of prepayments or defaults in the higher-yielding portfolio buckets. Scope has maintained its net excess spread assumption (defined as gross excess spread minus annual stressed senior fees and the yield compression rate).

Liquidity protection². Available liquidity continues to support the ratings, in accordance with Scope’s General Structured Finance Methodology.

Interest rate risk². The structure is partially hedged against interest rate risk arising from differences between the rates payable on the assets and the rates payable on the liabilities. The class A, B and C notes pay a floating rate while a portion of portfolio pays a fixed rate, either for the transaction’s life or for a pre-defined period before switching into floating rate. A cap hedging agreement combined with transaction structural 3-month Euribor coupon caps on class A, B and C notes mitigates interest rate risk. Our analysis embeds interest rate stresses, which are credit neutral for the rated notes.

Key rating drivers

The key rating drivers continue to be aligned with those disclosed on our rating action release dated 06 May 2021.

Key rating-change drivers

All else equal, the following factors may constitute upside or downside rating drivers:

• A material deviation of observed transaction performance from Scope’s current performance assumptions, or
   
• A material change in Scope’s forward-looking macro-economic outlook.

All else equal, the following factors may constitute upside rating drivers:

• Continued deleveraging of the capital structure and a reduction of the transaction’s risk horizon.

All else equal, the following factors may constitute downside rating drivers:

• A rating downgrade of a key counterparty beyond a level compliant with Scope’s Counterparty Risk Methodology, or
   
• A depletion of the reserve fund beyond a level commensurate with the then-current rating of the notes in accordance with Scope’s General Structured Finance Methodology.

Quantitative analysis and assumptions

Scope used a proprietary cash flow model to calculate the expected loss and expected weighted average life of each rated tranche, considering the transaction’s assets and liability structure. Asset cash flows are projected based on the securitised portfolio amortisation schedule and on committee-determined performance assumptions, which reflect the characteristics and quality of the portfolio. The model replicates the transaction’s key structural features, including the capital structure, the order of priority of the issuer’s liabilities, and enhancement features such as excess spread and cash reserves.

The key analytical assumptions include the following: an inverse-Gaussian distribution of portfolio remaining lifetime defaults, with a mean of 5.6% and a coefficient of variation of 91.5%; rating-conditional recovery rates ranging from 75.0% under a B scenario to 45.0% under a AAA scenario; high and low constant prepayment rate scenarios of 5.0% and 1.5%, respectively; stressed senior fees of 0.5%, and a portfolio yield compression and basis risk stress of 0.2% and 0.3%, respectively.

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 rating to input assumptions and is not indicative of expected or likely scenarios.

• A 50% increase in the mean default rate assumption has a one-notch quantitative impact on the class A notes, a three-notch quantitative impact on the class Z notes and a two-notch quantitative impact on the class B notes.
   
• A 50% decrease in Scope’s rating-conditional recovery rate assumptions has a one-notch quantitative impact on the class A notes, a three-notch quantitative impact on the class Z notes and a two-notch quantitative impact on the class B notes.

References
1. Investor reports
2. Transaction documentation
3. Scope affirms Spain’s credit ratings at A- with Stable Outlook

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 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.

Methodology
The methodologies used for these Credit Ratings, (General Structured Finance Rating Methodology, 25 January 2023; 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 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: Miguel Barata, Director
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
The final Credit Ratings were first released by Scope Ratings on 6 May 2021.

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
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab GmbH and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.