DBRS Finalises Provisional Ratings on IM GBP MBS 3

DBRS Ratings Limited (DBRS) has today finalised the provisional ratings on the following notes issued by IM Grupo Banco Popular MBS 3 (IM GBP MBS 3 or the Issuer):

-- EUR 702,000,000 Series A at A (sf)
-- EUR 198,000,000 Series B at C (sf)

IM GBP MBS 3 is a securitisation of a portfolio of prime residential mortgage loans secured by first-ranking lien mortgages on properties in Spain by Banco Español, SA (BPE) and Banco Pastor, SA (Pastor). At the closing of the transaction, IM GBP MBS 3 will use the proceeds of the Series A and Series B notes to fund the purchase of the mortgage portfolio from the Sellers, BPE and Pastor. BPE and Pastor will each be the servicer of the respective loans sold to the Issuer. In addition, BPE will provide separate Subordinated Loans to fund both the Reserve Fund and the initial transaction expenses. The securitisation will take place in the form of a fund, in accordance with Spanish Securitisation Law.

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 Series A notes benefit from EUR 198 million (22%) subordination of the Series B notes and the EUR 27 million (3%) Reserve Fund, which is available to cover senior fees as well as interest and principal of the Series A notes. The Reserve Fund target will remain at 3% of the initial balance of the Series A and Series B notes. The Series A notes will benefit from full sequential amortisation, where principal on the Series B notes will not be paid until the Series A notes have been redeemed in full. Additionally, the Series A principal will be senior to the Series B interest payments in the priority of payments.
-- The main characteristics of the portfolio as of 4 December 2015 include (1) 93.9% weighted-average current loan-to-value (WA CLTV) and 109.6% indexed WA CLTV (INE Q2 2015); (2) the top three geographical concentrations of Andalusia (21.4%), Madrid (19.8)% and Valencia (11.2%); (3) 31.6% of the borrowers are classified as self-employed; (4) 19.1% of non-national borrowers; (5) weighted-average seasoning of 3.3 years; and, (6) the weighted-average remaining term of the portfolio is 29.2 years, with 47.2% having a remaining term of greater than 30 years.
-- Of the mortgage portfolio, 95.8% pay a variable interest rate indexed to 12-month Euribor, and 4.1% pay a rate indexed to the IRPH (Indice de Referencia de Préstamos Hipotecarios). The notes are floating rate liabilities indexed to three-month Euribor. DBRS considers there to be limited basis risk in the transaction, which is mitigated by (1) the historical spread between 12- and three-month Euribor in favour of 12-month Euribor compared with IRPH; (2) the amounts credited to the Reserve Fund; and (3) the available credit enhancement to cover for potential shortfalls from the mismatch. DBRS stressed the interest rates as described in the DBRS methodology ‘Unified Interest Rate Model for European Securitisations’.
-- The credit quality of the mortgages backing the notes and the ability of the servicers to perform their servicing responsibilities. DBRS was provided with BPE’s and Pastor’s historical mortgage performance data for loans originated to individuals without LTV limits through branch channels (similar to the characteristics of the portfolio), as well as with loan-level data for the mortgage portfolio. Details of the probability of default (PD), loss given default (LGD) and expected losses (EL) resulting from DBRS’s credit analysis of the mortgage portfolio at A (low) and C (sf) stress scenarios are detailed below. In accordance with the transaction documentation, the servicers are able to grant loan modifications without consent of the management company within the range of permitted variations. According to the documentation, permitted variations for up to 10% of the initial portfolio balance include the reduction of the loan margins down to a spread equal to at least that of the notes and maturity extension up to the final payment date in April 2055. Additionally, up to 3% of the initial balance of loans may have a principal deferral period of up to 12 months. DBRS stressed 10% of the portfolio to have a margin equal to 0.40% and extended the maturity up to April 2055 in its cash flow analysis.
-- The transaction’s account bank agreement and respective replacement trigger require Popular 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 consistent with the account bank criteria.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS ‘Legal Criteria for European Structured Finance Transactions’ methodology.

As a result of the analytical consideration, DBRS derived a base case PD of 14.27% and LGD of 54.79%, which resulted in an EL of 7.82%, using the European RMBS Credit Model. DBRS cash flow model assumptions stress the 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 ratings 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.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
Other methodologies referenced in this transaction are listed at the end of this press release. This may 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 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 this rating include BPE and Significa InterMoney Titulización SGFT, S.A.

DBRS does not rely upon third-party due diligence in order to conduct its analysis.

DBRS was supplied with third-party assessments. 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 is the first rating action since the Initial Rating Date.

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

To assess the impact of the changing the transaction parameters on the rating of the Series A notes, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

In respect of the Series A Notes, the PD of 33.58% and LGD of 63.92%, corresponding to an A (sf) stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.

DBRS concludes the following impact on the Series A notes:
-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to a downgrade to BBB (sf).
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade to BBB (low) (sf).
-- A hypothetical increase of the PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to BB (sf).
-- A hypothetical increase of the PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to BB (sf).
-- A hypothetical increase of the PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to B (sf).

The Series B ratings would not be impacted by a hypothetical change in either the PD or LGD.

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: Keith Gorman, Senior Vice President
Rating Date: 11 December 2015
Rating Committee Chair: Diana Turner

Initial Rating Date: 3 December 2015 (Provisional Ratings)
Lead Surveillance Analyst: Kevin Ma

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

-- 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
-- Legal Criteria for European Structured Finance Transactions

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