DBRS Assigns Provisional Ratings to IM SABADELL PYME 10 FT

DBRS Ratings Limited (DBRS) has today assigned provisional ratings to the following notes issued by IM SABADELL PYME 10 FT (the Issuer):

-- EUR 1,448.1 million Series A Notes: AA (sf) (the Series A Notes)
-- EUR 301.9 million Series B Notes: CCC (low) (sf) (the Series B Notes, together, the Notes)

The transaction is a cash flow securitisation collateralised by a portfolio of term loans originated by Banco de Sabadell, S.A. (Sabadell or the Originator) to small and medium-sized enterprises (SMEs) and self-employed individuals based in Spain. As of 8 July 2016, the transaction’s provisional portfolio included 18,060 loans to 15,537 obligor groups, totalling EUR 1,883.8 million.

At closing, the Originator will select the final portfolio of EUR 1,750 million from the above-mentioned provisional pool.

The rating on the Series A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Legal Maturity Date in May 2049. The rating on the Series B Notes addresses the ultimate payment of interest and the ultimate payment of principal on or before the Legal Maturity Date May 2049.

Interest and principal payments on the Notes will be made quarterly on the 20th of February, May, August and November, with the first payment date being on 21 November 2016. The Notes will pay an interest rate equal to Euribor 3 Month plus a 0.75% margin and 0.90% for Series A and Series B, respectively.

The provisional pool is well diversified with no significant borrower concentration and relatively low industry concentration. There is some concentration to borrowers in Catalonia (33.6% of the portfolio balance) which is expected given that Catalonia is the home region of the Originator. The top one, ten and twenty borrowers represent 0.66%, 3.79% and 5.74% of the portfolio balance, respectively. The top three industry sectors by DBRS industry definition include “Building & Development”, “Business Equipment & Services” and “Food Services”, representing 15.8%, 10.5% and 7.3% of the portfolio outstanding balance, respectively.

These ratings are based upon DBRS’s review of the following items:
-- The transaction structure, the form and sufficiency of available credit enhancement and the portfolio characteristics.
-- At closing, the Series A Notes benefit from a total credit enhancement of 22%, which DBRS considers to be sufficient to support the AA (sf) rating. The Series B Notes benefit from a credit enhancement of 4.75%, which DBRS considers to be sufficient to support the CCC (low) (sf) rating. Credit enhancement is provided by subordination and the Reserve Fund.
-- The Reserve Fund is non-amortising for the life of the transaction. The Reserve Fund has a balance of EUR 83.1 million, 4.75% of the aggregate balance of the Notes, and is available to cover shortfalls in the senior expenses and interest in the Series A Notes and once the Series A Notes are fully paid, interest on Series B throughout the life of the Notes. The Reserve Fund will only be available as a credit support for the Notes at the Legal Final Maturity.
-- DBRS considers that there are inadequate mitigants to the commingling risk. To address this risk, DBRS analysis includes a stress equivalent to the interruption of interest and principal proceeds for a period of six months by assuming senior expenses and interest on the Series A Notes would be paid from the Cash Reserve for this period.

DBRS determined these ratings as follows, as per the principal methodology specified below:
-- The probability of default for the portfolio was determined using the historical performance information supplied. DBRS assumed an annualised probability of default (PD) of 2.06% for this portfolio.
-- The assumed weighted-average life (WAL) of the portfolio was 4.31 years.
-- The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the target ratings.
-- The recovery rate was determined by considering the market value declines (MVDs) for Spain, the security level and type of the collateral. For the Series A Notes, DBRS applied the following recovery rates: 68.6% for secured loans and 15.8% for unsecured loans. For the Series B Notes, DBRS applied the following recovery rates: 84.6% for secured loans and 21.5% for unsecured loans.
-- The break-even rates for the interest rate stresses and default timings were determined using the DBRS cash flow model.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating CLOs Backed by Loans to European SMEs”. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

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

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

The sources of information used for these ratings include the parties involved in the ratings, including but not limited to the Originator, Banco de Sabadell S.A., the Issuer and Intermoney Titulización S.G.F.T., 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 determined key inputs used in its analysis based on historical performance data provided for the Originator and Servicer as well as analysis of the current economic environment. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Further information on DBRS’s analysis of this transaction will be available in a rating report on http://www.dbrs.com or by contacting us at info@dbrs.com.

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.

These ratings concern newly issued financial instruments.

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

To assess the impact a change of the transaction parameters would have on the ratings, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):
-- Probability of Default Rates Used: Base Case PD of 2.06%, a 10% increase of the base case and a 20% increase of the base case PD.
-- Recovery Rates Used: Base Case Recovery Rates of 32.62% at the AA (sf) stress level and 41.64% at the CCC (low) (sf) stress level for the Series A Notes and Series B Notes, respectively, a 10% and 20% decrease in the Base Case Recovery Rates.

DBRS concludes that a hypothetical increase of the Base Case PD by 20% would lead to a downgrade of the Series A Notes to A (high) (sf), and a hypothetical decrease of the recovery rate by 20% and would lead to a downgrade of the Series A Notes to AA (low) (sf). A scenario combining both an increase in the Base Case PD by 10% and a decrease in the Base Case Recovery Rate by 10% would lead to a downgrade of the Series A Notes to AA (low) (sf).

Regarding the Series B Notes, a hypothetical increase of the Base Case PD by 20% or a hypothetical decrease of the Base Case Recovery Rate by 20% would lead to a downgrade of the Series B Notes to CC (sf). A scenario combining both an increase in the Base Case PD by 10% and a decrease in the Base Case Recovery Rate by 10% would lead to a downgrade of the Series B Notes to CC (sf).

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

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/cerepweb/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: María López, Vice President
Initial Rating Date: 28 July 2016
Initial Rating Committee Chair: Jerry van Koolbergen, Managing Director

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

“Rating CLOs Backed by Loans to European SMEs”
“Legal Criteria for European Structured Finance Transactions”
“Operational Risk Assessment for European Structured Finance Servicers”
"Operational Risk Assessment for European Structured Finance Originators"
“Unified Interest Rate Model for U.S. and European Structured Credit”
“Cash Flow Assumptions for Corporate Credit Securitizations”
“Rating Methodology for CLOs and CDOs of Large Corporate Credit”
“European RMBS Insight Methodology and European RMBS Insight: Spanish Addendum”

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.