DBRS Confirms Ratings on Notes issued by FTA PYMES BANESTO 3 and Removes UR-Developing

DBRS Ratings Limited (“DBRS”) has today confirmed the ratings on the following Notes issued by FTA PYMES BANESTO 3 (the “Issuer”) and has removed Under Review with Developing Implications.

• EUR 265,010,034.45 Series A Notes: Confirmed at A (sf)
• EUR 63,700,000.00 Series B Notes: Confirmed at BBB (sf)
• EUR 98,000,000.00 Series C Notes: Confirmed at C (sf)

The transaction is a cash flow securitisation collateralised primarily by a portfolio of bank loans originated by Banco Español de Crédito, S.A. (“Banesto”) to large corporations and small and medium-sized enterprises (“SMEs”) based in Spain. The rating of the Series A Notes addresses the timely payment of interest and the ultimate payment of principal payable on or before the Legal Final Maturity on 18 October 2034. The rating of the Series B Notes addresses the ultimate payment of interest and the ultimate payment of principal payable on or before the Legal Final Maturity on 18 October 2034. The Series C Notes are in the first loss position and, as such, are highly likely to default. Given the characteristics of the Series C notes as defined in the transaction documents, the default most likely would only be recognised at the maturity or early termination of the transaction.

The rating action reflects a material update to the methodology DBRS uses to rate and monitor CLOs backed by loans to European SMEs (see “Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)”, published 15 October 2013).

This methodology supersedes the previous methodology “Master European Granular Corporate Securitisations (SME CLOs)” published 14 June 2011 and the “Small and Medium Enterprise Loans” section of the “Master European Structured Finance Surveillance Methodology” published 5 December 2012.

This methodology (a) updates correlation assumptions, including a new DBRS Diversity Model that replaces the DBRS Large Pool Model, (b) brings recovery assumptions into line with those used in the large corporate credit CDO (for loans not secured by real estate) and EU RMBS (for loans secured by real estate) methodologies, (c) clarifies the methods of computation of the portfolio annualised probability of default (“PD”), and (d) incorporates the current DBRS Idealized Default Table.

As a result of these changes, the rating of the Series A, Series B and Series C Notes have been confirmed, based upon the following analytical considerations:

• Portfolio performance after taking into consideration the level of amortization, defaults and delinquencies, as of the 20 January 2014 Payment Date.
• Updated recovery rates, determined by considering the market value declines for Spain, the security level, and type of collateral.
• Updated PD for the Originators according to the new methodology factoring in prepayment assumptions, maturity vectors and corresponding repayment assumptions, and historical default across different loan types.
• Updated correlation assumptions, based on the granularity of the current portfolio. The PD and portfolio weighted average life were used in the DBRS Diversity Model to generate the hurdle rates for the current portfolio.
• The break even rates for the interest rate stresses and default timings were determined using the DBRS Cash Flow Model.

This transaction closed less than 18 months ago. The definition of doubtful loans includes loans that are delinquent with a period of arrears equal to or greater than 18 months in payment of overdue amounts. As such, there were no cumulative defaults reported at the last payment date. The current 90 days past due delinquency ratio as a percentage of the original balance was 1.92%. The recalculated PD has increased to the same amount: 1.92%.

Despite the higher recalculated Base Case PD, the Series A and Series B Notes benefit from low levels of arrears and defaults and from a higher credit enhancement resulting from the deleveraging of the transaction.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable is “Rating CLOs Backed by Loans to European Small and Medium Sized Enterprises (SMEs)”, which can be found on the DBRS website under Methodologies at http://www.dbrs.com/about/methodologies. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.
For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for these ratings include the parties involved in the rating, including but not limited to the Originators, the Issuer and their agents.

DBRS considers the information made available to it for the purposes of providing these ratings to have been of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

To assess the impact of changing the transaction parameters on the ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the ratings (the “Base Case”):
• Probability of Default Rates Used: Base Case PD of 1.92%, a 10% and 20% increase on the Base Case PD.
• Recovery Rates Used: Base Case Recovery Rates, corresponding to a recovery rate of 16.25% at the A (sf) stress level and of 17.00% at the BBB (sf) stress level, a 10% and 20% decrease in the Base Case Recovery Rates.

DBRS concludes that either a hypothetical increase of the base PD by 20%, ceteris paribus, or a hypothetical decrease of the Recovery Rate by 20%, would produce model results suggesting a confirmation of the Series A Notes at A (sf) and of the Series B Notes at BBB (sf). A scenario combining both a hypothetical increase in the PD by 10% and a hypothetical decrease in the Recovery Rate by 10% would also lead to model results suggesting a confirmation of the Series A Notes at A (sf) and of the Series B Notes at BBB (sf).

It should be noted that the interest rates and other parameters that would normally vary with rating level, including the recovery rates, were allowed to change as per the DBRS methodologies and criteria.

The previous rating action on this transaction took place on 16 October 2013, when the ratings of the Series A, Series B and Series C Notes were placed Under Review with Developing Implications.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com

For further information on DBRS’s historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Mudasar Chaudhry
Initial Rating Date: 17 January 2013
Initial Rating Committee Chair: Jerry Van Koolbergen

Lead Surveillance Analyst: Alfonso Candelas
Rating Committee Chair: Jerry Van Koolbergen

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

“Legal Criteria for European Structured Finance Transactions”
“Master European Structured Finance Surveillance Methodology”
“Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)”
“Rating Methodology for CLOs and CDOs of Large Corporate Credit”
“Cash Flow Assumptions for Corporate Credit Securitizations”
“Operational Risk Assessment for European Structured Finance Servicers”
“Unified Interest Rate Model for U.S. and European Structured Credit”
“Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”