Rating action

On 27 July 2023, Scope Ratings GmbH (Scope) completed a monitoring review for the Series 2022-308 notes issued by Single Platform Investment Repackaging Entity SA (SPIRE). The rating action is as follows:

Series 2022-308 (ISIN: XS2563843296), EUR 120,933,000: affirmed at A+

Transaction overview

The transaction is a repackaged issuance of the Czech Republic’s 0.45% 2023, 1.25% 2025, 2.4% 2025, 0.25% 2027, FRN 2027, 2.5% 2028, 0.05% 2029, 1.2% 2031, FRN 2031, and 1.75% 2032 bonds to EUR instalment notes. The rated notes are issued by SPIRE, acting in respect of its Compartment Series 2022-308. They offer investors a fixed schedule of interest and principal instalment repayments in EUR, whereas the underlying Czech sovereign bonds pay fixed and floating interest rates in Czech Koruna.

The interest and currency mismatch between the underlying collateral and the rated notes is addressed through an embedded swap between counterparty Credit Suisse International (CSI) and the issuer of the rated notes. The transaction also has counterparty risk exposures to HSBC Bank plc as custodian and to CSI as the disposal and calculation agent.

Since the release of the final credit rating on 9 December 2022, the Series 2022-308 EUR 114,383,000 instalment secured notes due 2031 have been restructured and consolidated with the Series 2022-308 EUR 6,550,000 instalment secured notes due 2032 to form a single series.

SPIRE is a securitisation programme created on 26 May 2016 and domiciled in Luxembourg.

Rating rationale

The rating reflects: i) the credit quality and characteristics of the underlying assets; ii) the credit quality of the swap counterparty and potential mitigants to counterparty risk; iii) the potential swap mark-to-market evolution of the embedded swap; and iv) the legal and financial structure of the transaction.

Key rating drivers

Underlying collateral (positive)¹. The credit strength of sovereign debt issued by the Czech Republic is directly linked to its macroeconomic environment. Despite the recent downgrade, the Czech Republic’s long-term rating of AA- remains underpinned by the following credit strengths: i) strong fiscal policy with a resilient debt profile; ii) improvements in external position; and iii) a competitive industrial base supported by large and steady foreign direct investment and EU funds.

Swap Counterparty (positive). CSI is the swap counterparty to the issuer. CSI’s strong credit quality implies a low likelihood of default and limits its contribution to expected loss.

Transaction structure (positive)². SPIRE established its single platform in May 2016 and has since facilitated several transactions. The issuance terms agreed for this platform make the issuance of the rated notes simple and efficient. The availability of other dealers reduces any friction should the swap counterparty be replaced.

Low correlation (positive). The Czech Republic and CSI have different operating macroeconomic conditions, which reduces the likelihood of a joint default of the underlying collateral and the swap counterparty.

Overcollateralisation (positive)³. The overcollateralisation present for most of the transaction life would provide an additional source of recovery upon the default of the assets.

Instalment schedule (positive)³. The repayment of note principal in the form of instalments as opposed to a bullet repayment at maturity reduces outstanding note notional and therefore reduces the severity of loss upon a Czech Republic default.

Early settlement of swap mark-to-market (negative)³. A mismatch between incoming and outgoing legs of the swap could create mark-to-market positions that need to be settled upon early termination of the transaction.

Credit support annex friction (negative)³. Valuation haircuts and minimum transfer amounts on collateral posted under the credit support annex introduces potential losses for SPIRE in the event of swap counterparty default and replacement. The eligible currency options may further expose the transaction to foreign exchange risk.

Margining risks (negative)³. Large swap mark-to-market spikes in favour of the issuer introduce potential scenarios of mismatch between the mark-to-market and collateral posted. However, this is partially mitigated by the strict margining requirements under the credit support annex.

Rating-change drivers

Positive:

Better-than-expected performance of underlying collateral. The rating of the notes could improve if the underlying collateral’s rating strengthened.

Negative:

Worse-than-expected performance of underlying collateral. The rating of the notes could deteriorate if the underlying collateral’s rating worsened.

Quantitative analysis and assumptions

Scope performed the quantitative analysis using a bespoke tool to capture the main risks associated with the notes. The tool calculates the expected loss and weighted average life of the notes in line with Scope’s General Structured Finance Rating Methodology.

As a first step, Scope identified the primary risks:

Scenario 1: default of the underlying collateral,

Scenario 2: default of the swap counterparty.

For Scenario 1, Scope derived the probability of default for the expected maturity from the ratings of the underlying collateral. The loss given default is calculated as the sum of: i) the unrecovered notional amount from the sale of the Czech bonds; and ii) amounts to cover any negative mark-to-market position owed to the swap counterparty.

Scope tested several assumptions on future mark-to-market values, including a stressed negative value, a stressed positive value, and the forward implied mark-to-market value.

The expected loss calculated under scenario 1 is the largest contributor to the final expected loss.

For Scenario 2, Scope derived the probability of default based on CSI’s credit ratings, calculated as the probability of CSI’s default conditional to the survival of the underlying collateral.

Upon the swap counterparty’s replacement, loss given default would arise only from replacement costs incurred by SPIRE due to changes in value of both the collateral posted under the credit support annex and the mark-to-market position until a swap counterparty replacement were found.

The modelling assumptions imply that a default of the swap counterparty will systematically create a loss in the computation due to credit support annex friction.

Scope gives credit to the SPIRE framework and range of participating dealers, which have been set up to allow ease of replacement in the event of this default scenario.

Further, commingling risk with the custodian is immaterial due to the rating trigger. Therefore, Scope did not consider it in its quantitative analysis.

Finally, Scope calculated the notes’ total expected loss by weighing the loss given default for each scenario with its respective likelihood.

Sensitivity analysis

Scope tested the resilience of the rating to deviations in the main input parameters: the underlying bond ratings, the swap counterparty rating, and swap mark-to-market expectations. 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 results would change compared to the assigned credit rating in the event of:

• a downgrade of the underlying entity by one notch, one notch;
   
• a downgrade of the swap counterparty by three notches, zero notches; and
   
• the assumption of a stressed negative value for the mark-to-market value of the swap, one notch.

Rating driver references
1. Scope's sovereign rating on the Czech Republic
2. Base documentation and marketing material for the SPIRE programme
3. Term sheets, series memorandum, issue deed, supplemental deed, swap confirmation (Confidential)

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 assumptions, 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, 13 July 2023), 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 are 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: Jack Holbrook, Specialist
Person responsible for approval of the Credit Rating: David Bergman, Managing Director
The Credit Rating was first released by Scope Ratings on 12 December 2022.

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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