Rating action

Scope Ratings GmbH (Scope) has performed the following rating action after completing a monitoring review on the notes issued by CiMA Finance DAC:

Secured loan participation notes (ISIN XS2458268187), up to EUR 1,000.0m: BBB- under review for a developing outcome

Transaction overview

The transaction is a repackaging of project finance 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 original issue date (5 April 2022) with the grantor, Banco Santander S.A. (Banco Santander) while the two underlying loans part of the funded participation finance the operations of solar power and thermal plants in Spain.

On 29 November 2022, the issuer and Banco Santander have entered a further loan participation under the same general terms referencing seven additional underlying loans financing the operations of onshore wind parks and solar power plants in Spain. On 22 November 2023, the grantor notified Scope that they are in the process of identifying a suitable option to exercise their rights as grantor under clauses 4.1 and 4.2 of the loan participation agreement entered into in connection with the notes in order to replace two underlying loans with eligible underlying loans, as defined in the loan participation agreement, or withdraw the relevant underlying loans. Early termination of the loan participation agreement due to following conditions: i) all underlying loans experience an event of default, ii) a grantor event of default occurs and iii) the secured loan participation notes are terminated early will result in the grantor assigning, on behalf of the issuer, to each noteholder its pro-rata participation in the underlying loans and the secured loan participation notes will be terminated. If the grantor does not perform this assignment, the trustee will do it on behalf of the grantor, who has granted in favour of the trustee an irrevocable power of attorney to perform such assignment.

The issuer becomes the beneficiary of the payments made under the loan participation agreements 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 in April 2032. Together with the notes issued at original issue date, a further issue of EUR 336,843,171 on 29 November 2022 formed the secured loan participation notes. After the interest payment on 9 October 2023 the outstanding balance of the notes was EUR 395.5m and the transaction has performed in line with Scope’s expectation with no missed payment of the notes’ coupon or principal.

Rating rationale

The rating reflects: i) the legal and financial structure of the transaction; ii) the credit quality and recovery prospects of the underlying project finance 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

Underlying loans’ credit quality (positive)¹. The majority of the underlying loans is of investment grade quality with predictable cash flows and a solid operating history with experienced sponsors.

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)

Underlying loans’ dependence on regulatory regimes (negative)¹. Revenues for the loans underlying the transaction are heavily reliant on regulatory regimes. Any regulatory change can therefore negatively impact the predictability of revenues.

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

Adverse consequences of Banco Santander’s default on the underlying loans (negative)^1,2. A default of Banco Santander 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.

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

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.

Degradation of Banco Santander’s credit quality. 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 become higher 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 Spanish government bonds during the 2012 European sovereign crisis. This level of stress appropriately captures the likely distressed nature of the Spanish 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, two notches;
   
• a downgrade of Banco Santander’s rating by three notches, two 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 Scope Ratings’ Portfolio Model Version 1.1 and 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.
The model used for this Credit Rating is (Portfolio 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 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 Credit Rating was first released by Scope Ratings on 6 April 2022. The Credit Rating was last updated on 30 November 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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