Rating action

The rating action performed by Scope Ratings GmbH (Scope) is as follows:

Secured loan participation notes (ISIN XS2585984078), up to EUR 1,000.0m: assigned a new preliminary rating of (P) BBB-

The preliminary rating relies on the information made available to Scope up to 27 March 2023. Scope may assign final ratings subject to the review of the final version of all transaction documents and legal opinions. Final credit ratings may deviate from preliminary ratings.

Transaction overview

The transaction is a repackaging of corporate loans via notes issued by CiMA Finance DAC, which was incorporated in Ireland as a special purpose vehicle to issue the debt obligations under a programme arranged by Banco Santander S.A., London Branch. The transaction does not involve a true sale of the underlying loans. The issuer entered into a loan participation agreement on the issue date with the grantor, Banco Santander S.A. (Banco Santander); the underlying portfolio consists of corporate loans from seven borrowers located in four European countries across multiple industries. The issuer becomes the beneficiary of the payments made under the loan participation agreement in exchange for the participation purchase price. The participation purchase price is financed through the issuance of the secured loan participation notes with a final maturity date of [Expected March 2033].

Rating rationale

The rating reflects: i) the legal and financial structure of the transaction; ii) the credit quality and recovery prospects of the underlying corporate loans; iii) the exposure to Banco Santander as grantor, swap counterparty, dealer, realisation agent, determination agent, interest calculation agent and account bank; and iv) the exposure to other transaction counterparties.

Key rating drivers

Borrowers’ credit quality (positive)¹. The underlying portfolio consists of loans from seven borrowers across multiple industries and countries, of which the average credit quality is investment grade.

Banco Santander’s credit quality (positive)². Banco Santander’s strong credit quality and sophisticated operations imply a low probability of financial default and low operational risk. As a transaction counterparty, the bank therefore contributes little to the expected loss of the rated notes.

Transaction structure (positive)¹. The CiMA Finance programme, established by Banco Santander, has been active since 2011 and enables the simple and efficient issuance of the notes. (ESG factor)

Concentrated portfolio to the largest obligor (negative)¹. The underlying portfolio at closing is highly concentrated to the largest obligor, whose share accounts for almost 50% of the total portfolio.

Early termination events (negative)^1,2. The rated notes are exposed to early termination events linked to the performance of the underlying loans and to Banco Santander’s performance in some of its roles in the transaction (e.g. grantor, swap counterparty). Early termination events may lead to losses for the noteholders and are mitigated by Banco Santander’s strong credit quality.

Adverse consequences of Banco Santander’s default on the underlying loans (negative)^1,2. Banco Santander defaulting would result in a stressed environment, especially for the financial instruments linked to Spanish obligors. Scope expects the underlying loans to be valued at a significant discount to par in such an environment. Scope has classified Banco Santander’s counterparty risk materiality as excessive. As a mitigant, the sensitivity tests indicate zero notches impact on the notes’ rating in case of a downgrade of Banco Santander’s rating by three notches.

Upside rating-change drivers

Better-than-expected performance of the underlying loans. An improvement of the credit quality or recovery prospects of the underlying loans may lead to an upgrade of the notes’ rating.

Downside rating-change drivers

Worse-than-expected performance of the underlying loans. A deterioration of the credit quality or recovery prospects of the underlying loans may lead to a downgrade of the notes’ rating.

Weakening credit quality for Banco Santander. A significant deterioration in Banco Santander’s credit quality may lead to a downgrade of the notes’ rating.

Increasing probably of missing a principal payment. Should the credit quality of the current underlying loans deteriorate or more underlying loans become part of the charged assets, the probability of a missed payment of the notes’ principal will increase given the passthrough nature of the rated notes.

Quantitative analysis and assumptions

Scope’s rating on the notes reflects the expected loss associated with the ultimate payment of principal by the applicable contractual maturity date. Scope derives expected cash flows accounting for the credit quality of the underlying loans and of Banco Santander.

The main sources of losses for the rated notes are, in order of magnitude: i) a default of an underlying loan; and ii) a failure by Banco Santander to perform its obligations under the loan participation agreement or charged agreement: the first scenario assumes Banco Santander has not defaulted and the notes are repaid using recovery proceeds from the underlying loans minus liquidation costs, the second scenario assumes the underlying loans are still performing and the notes are repaid using disposal proceeds from the underlying loans minus liquidations costs. Scope quantified the disposal proceeds by assuming the underlying loans are sold at stressed price, based on a yield commensurate with the stressed levels observed for the government bonds of the countries of incorporation of the different borrowers during the 2012 European sovereign crisis. This level of stress appropriately captures the likely distressed nature of corresponding fixed-income markets should Banco Santander fall into financial distress. The liquidation costs include the settlement amount due under the charged agreement. Scope has used its own ratings to determine the credit quality of the underlying loans and Banco Santander.

The rating assigned to the secured loan participation notes reflects expected losses over the instrument’s weighted average life commensurate with Scope’s idealised expected loss table. Scope calculated the notes’ total expected loss by weighing the loss given default for each scenario with its respective likelihood of occurrence.

Sensitivity analysis

Scope tested the resilience of the rating against deviations in main input parameters: the credit quality of the underlying loans and the credit quality of Banco Santander. 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 change compared to the assigned credit rating in the event of:

• a downgrade of each underlying loan by one notch, one notch;
   
• a downgrade of Banco Santander’s rating by three notches, zero notches.

Should more underlying loans become part of the charged assets, Scope expects the probability of a missed ultimate payment of principal to become higher given the pass-through nature of the rated notes.

Rating driver references
1. Internal information and documents of the issuer, originator and arranger (Confidential)
2. Banco Santander’s rating assigned by Scope (Available via subscription)

Stress testing
No stress testing was performed.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of a bespoke tool incorporating the relevant asset assumption, taking into account the transaction’s main structural features. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for this Credit Rating, (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.
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: Guang Yang, Analyst
Person responsible for approval of the Credit Rating: David Bergman, Managing Director
The preliminary Credit Rating was first released by Scope Ratings on 29 March 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings. 

Conditions of use / exclusion of liability
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