Scope assigns B+ rating to notes issued by SPIRE SA acting in respect of its Series 2023-295
Scope Ratings GmbH (Scope) has assigned a final rating for the Series 2023-295 notes issued by Single Platform Investment Repackaging Entity SA (SPIRE). The rating action is as follows:
Series 2023-295 (ISIN: XS2665175647), EUR 13,700,000: assigned new rating of B+
The transaction, Series 2023-295, is a repackaged issuance of AIB Group PLC’s 2.25% 2028 bonds to inflation-linked notes with a notional amount of EUR 13.7m.
The transaction’s underlying collateral (AIB bonds) pays fixed interest rates in EUR, whereas the rated notes pay structured floating rates of interest in EUR. The redemption and floating interest rates of the rated notes are linked to the Harmonised Consumer Price Index ex-Tobacco for the Euro area (HICP).
The interest rate mismatch between the underlying collateral and the rated notes is addressed through a swap between the swap counterparty Merrill Lynch International (MLI) and the issuer of the rated notes. The transaction also has counterparty risk exposures to HSBC Bank plc as custodian and to MLI as the disposal and calculation agent.
The rating reflects: i) the credit quality and characteristics of the underlying collateral; 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’s credit quality (positive)1. AIB Group’s credit quality is underpinned by the following credit strengths: i) well positioned to benefit from the ongoing consolidation in the Irish banking sector; ii) solid prudential metrics, including a strong capital position and a significantly improved ratio of loans to customer deposits; and iii) resilient Irish macroeconomic performance combined with sound regulatory initiatives.
Swap counterparty (positive). Merrill Lynch International (MLI) is the swap counterparty to the issuer. MLI’s strong credit quality implies a lower likelihood of default and thereby reduces 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.
Call risk (negative)3. The issuer call provision of the underlying collateral introduces scenarios where the calculated redemption amounts could create a loss for the investor. Scope views such events as a potential default, thereby constraining the rating outcome.
Early settlement of swap mark-to-market (negative)4. The 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.
CSA friction (negative)4. Valuation haircuts and minimum transfer amounts on collateral posted under the Credit Support Annex (CSA) introduce potential losses for SPIRE in the event of early termination. The eligible currency options may further expose the transaction to foreign exchange risk.
Better-than-expected performance of underlying collateral. The rating for the notes could improve if the underlying collateral’s rating strengthens.
Lower-than-expected probability of call. The rating for the notes could improve if the likelihood of underlying collateral call in the near future decreases.
Worse-than-expected performance of underlying collateral. The rating for the notes could deteriorate if the underlying collateral’s credit quality worsens.
Higher-than-expected probability of call. The rating for the notes could deteriorate if the likelihood of underlying collateral call in the near future increases.
Quantitative analysis and assumptions
Scope performed the quantitative analysis using a bespoke tool tailored 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.
The quantitative analysis is aligned with forward HICP expectations.
Scope identified the primary risks:
Scenario 1: default of the underlying collateral,
Scenario 2: default of the swap counterparty,
Scenario 3: exercise of underlying collateral call.
For Scenario 1, Scope derived the probability of default for the expected maturity from the credit rating of the underlying collateral, conditional on the survival of the swap counterparty.
The loss given default is calculated as the sum of: i) the unrecovered notional amount from the sale of the AIB 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.
For Scenario 2, Scope derived the probability of default based on MLI’s credit rating, calculated as the probability of MLI’s default conditional on the survival of the underlying collateral.
Given no swap counterparty replacement mechanism, loss given default could arise from termination costs incurred by the issuer due to settlement of the swap agreement and CSA friction on the collateral posted.
For Scenario 3, Scope opts for a conservative assumption of a very high likelihood of call exercise when the underlying issuer call is applicable. This scenario involves a potential loss for the investor resulting from early swap settlement amounts. Scope models such event as a potential default.
Scenario 3 implies a minimum likelihood of default which constrains the best possible credit rating according to our General Structured Finance Rating Methodology.
The high likelihood of call, in combination with a short remaining time until the call is applicable results in scenario 3 being the main risk driver of the transaction.
Further, commingling risk with the custodian is immaterial due to the rating trigger. Therefore, Scope did not consider it in its quantitative analysis.
Scope tested the resilience of the rating to deviations in the main input parameters: the underlying bond rating, 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 the results change compared to the assigned credit rating in the event of:
a downgrade of the underlying entity by one notch, zero notches;
a downgrade of the swap counterparty by three notches, zero notches; and
- the assumption of the stressed negative value for the mark-to-market value of the swap, zero notches.
Rating driver references
1. Scope Corporate rating on AIB Group plc (Confidential)
2. Base documentation and marketing materials for the SPIRE programme
3. Underlying collateral final terms
4. Term sheets, series memorandum, issue deed, swap confirmation (Confidential)
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.
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.
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 29 September 2023.
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings. The Chair of the Supervisory Board of Scope SE & Co. KGaA has a significant relationship with Bank of America DAC, a related third party of this transaction.
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, 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.