DBRS Finalises Provisional Ratings to Notes Issued by IM EVO RMBS 1 FT

DBRS Ratings Limited (DBRS) has today finalised the provisional ratings of the following notes issued by IM EVO RMBS 1 FT:

-- A (sf) to EUR 468,700,000 issuance of Series A notes
-- BBB (sf) to EUR 31,300,000 issuance of Series B notes

IM EVO RMBS 1 FT (IM EVO) is a securitisation of a portfolio of prime residential mortgage loans and secured by first-ranking lien mortgages on properties in Spain, originated by Nova Caixa Galicia (NCG, now Abanca Corporación Bancaria S.A.) and EVO Banco S.A.U. (EVO) (NR). As of the closing date of the transaction, IM EVO has used the proceeds of the Series A and B notes issuance to fund the purchase of the mortgage portfolio. In addition, the reserve fund is financed through the issuance of a subordinated loan granted by EVO. The securitisation has taken place in the form of a fund, in accordance with Spanish Securitisation Law.

The ratings address the timely payment of interest and ultimate payment of principal of the Series A and B notes.

The ratings are based upon a review by DBRS of the following analytical considerations:

• The transaction’s capital structure and the form and sufficiency of available credit enhancement. The rated Series A notes benefit from 13.8% of credit enhancement in the form of the EUR 31.3 million (6.3%) subordination of the Series B notes and the EUR 37.5 million (7.5%) of the reserve fund, which is available to cover senior fees, interest and principal of the Series A and B notes.

• The main characteristics of the portfolio as of 31 May 2015 cut-off date include: (1) 57.7% weighted-average current unindexed loan–to-value (WA CLTV) and 84.4% Indexed WA CLTV (INE HPI Q1 2015); (2) the top three portfolio geographical concentrations, which are Madrid (22.2%), Andalusia (16.0%) and Catalonia (15.4%); (3) 9.6% of loans where the respective borrower did not have a permanent working contract as of origination date; (4) 2.4% of loans to non-national borrowers; (5) a weighted-average seasoning of 4.9 years; (6) 23.1% of loans originated by EVO and 76.9% by NCG.

• EVO as the servicer and collection account bank in this transaction is not rated. The bank was founded by NCG as a result of the restructuring of the Spanish banking system and represented the performing assets of its non-core operations, mainly outside of NCG’s core regions of activity. The new bank was purchased by Apollo European Principal Finance Fund II (Apollo) in 2013 and started lending and servicing mortgage loans to borrowers in Spain independently in 2014. EVO is a deposit-taking entity regulated and supervised by the Bank of Spain. EVO in its role as servicer will sweep collections received daily to the treasury account bank at Banco Santander SA (A/Stable/R-2 (low)/Stable). InterMoney Titulización SGFT, S.A. (Intermoney), in its role as management company, will monitor the servicing activity of EVO. In circumstances according to a set of criteria defined in the prospectus, such as a servicer insolvency, Intermoney would try to find a servicer replacement. Furthermore DBRS tested in its cash flow analysis the resilience of the notes to sudden payment disruption by applying a month collection loss in its stress scenarios and thinks that the transaction’s set up is in line with the assigned ratings.

• The transaction’s account bank agreement and respective replacement trigger require Santander acting as the treasury account bank to find (1) a replacement account bank or (2) an account bank guarantor upon loss of a BBB rating. DBRS concluded that the assigned ratings are in line with its account bank criteria.

• The mortgage portfolio pays a variable interest rate linked to 12-month Euribor in contrast to the issued notes’ variable interest rate, which is linked to three-month Euribor. In addition, 31.5% of the outstanding mortgage loans have an interest rate cap with a weighted average interest rate at 10.9%. DBRS considers the risk in the transaction to be mitigated by (1) the historical positive spread between 12- and three-month Euribor in favour of 12-month Euribor; (2) the monies standing to the credit of the reserve fund; (3) the single priority payments allowed the use of principal to pay interest; and (4) the available credit enhancement to cover for potential shortfalls from the mismatch. DBRS stressed the existing risk in its cash flow modelling.

• The performance of the mortgage portfolio up-to-date. In deriving its default assumptions, DBRS analysed the monthly payment history of the underlying mortgage portfolio. The time series covered the period from January 2008 until April 2015. During this time 99.8% of the portfolio has been never more than 90+ days in arrears and early stage delinquencies remained at very low levels. DBRS also took into consideration that 23.1% of the outstanding mortgage loans were originated by EVO over the past one-and-a-half years. DBRS assumes in its base case that the borrower’s propensity to default would follow the pattern of similar loans existing in the Spanish market (on the basis of loan-to-value and geography), but assumes a lower propensity to default for the 76.9% of outstanding mortgage loans from NGC given the stable performance observed for the past years.

• According to the transaction’s documentation, permitted variations include the reduction of the loan margins down to a weighted-average of 1.0% of the mortgage portfolio and maturity extension for 10% of the portfolio up to the final payment date in April 2058. DBRS stressed the margin of loans with a margin above 1.0% and the repayment of the portfolio for longer amortisation in its cash flow modelling.

• DBRS used a combination of default timing curves (front- and back-ended), rising and declining interest rates and low, medium and high prepayment scenarios in accordance with the DBRS rating methodology to stress the cash flows. Given the low prepayment level observed in Spain, currently below 5.0%, DBRS also tested a scenario with zero prepayments.

• The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

As a result of the analytical considerations, DBRS derived a base case Probability of Default (PD) of 4.5% and Loss Given Default (LGD) of 28.4%, which resulted in an Expected Loss (EL) of 1.3%.

DBRS cash flow model assumptions focus on the amount and timing of defaults and recoveries, prepayment speeds and interest rates. Based on a combination of these assumptions, a total of 16 cash flow scenarios were applied to test the capital structure and derive the rating of the Notes.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include EVO Banco S.A.U. and InterMoney Titulización SGFT, S.A. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; however, Agreed upon Procedures (AUP) are included in the requested documentation. DBRS was provided with an AUP for the provisional rating analysis. However this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating was 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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

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

To assess the impact of potential changes in the transaction’s parameters on the ratings, DBRS considered two additional stresses assuming a 25% and 50% increase in both the PD and LGD assumptions for the bonds.

The hypothetical results of the sensitivity analysis on the Series A notes would be:

A constant PD and a hypothetical increase in the LGD of 0% would lead to a rating of A (sf)
A constant PD and a hypothetical increase in the LGD of 25% would lead to a rating of BBB (high) (sf)
A constant PD and a hypothetical increase in the LGD of 50% would lead to a rating of BBB (sf)
A hypothetical increase of the PD of 25% and a constant LGD would lead to a rating of A (low) (sf)
A hypothetical increase of the PD of 25% and the LGD of 25% would lead to a rating of BBB (sf)
A hypothetical increase of the PD of 25% and the LGD of 50% would lead to a rating of BB (high) (sf)
A hypothetical increase of the PD of 50% and a constant LGD would lead to a rating of BBB (sf)
A hypothetical increase of the PD of 50% and the LGD of 25% would lead to a rating of BB (high) (sf)
A hypothetical increase of the PD of 50% and the LGD of 50% would lead to a rating of BB (sf)

The hypothetical results of the sensitivity analysis on the Series B notes would be:

A constant PD and a hypothetical increase in the LGD of 0% would lead to a rating of BBB (sf)
A constant PD and a hypothetical increase in the LGD of 25% would lead to a rating of BBB (sf)
A constant PD and a hypothetical increase in the LGD of 50% would lead to a rating of BBB (low) (sf)
A hypothetical increase of the PD of 25% and a constant LGD would lead to a rating of BBB (sf)
A hypothetical increase of the PD of 25% and the LGD of 25% would lead to a rating of BBB (low) (sf)
A hypothetical increase of the PD of 25% and the LGD of 50% would lead to a rating of BB (high) (sf)
A hypothetical increase of the PD of 50% and a constant LGD would lead to a rating of BBB (low) (sf)
A hypothetical increase of the PD of 50% and the LGD of 25% would lead to a rating of BB (high) (sf)
A hypothetical increase of the PD of 50% and the LGD of 50% would lead to a rating of BB (high) (sf)
For further information on DBRS 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.

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

Initial Lead Analyst: Sebastian Hoepfner, Vice President
Initial Rating Date: 14 July 2015
Initial Rating Committee Chair: Diana Turner, Senior Vice President
Lead Surveillance Analyst: Vito Natale, Senior Vice President

DBRS Ratings Limited
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London EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960.

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

Legal Criteria for European Structured Finance Transactions
Operational Risk Assessment for European Structured Finance Servicers
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
Unified Interest Rate Model for European Securitisations

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.