DBRS Assigns Provisional Ratings to IM SABADELL PYME, 11 FT

DBRS Ratings Limited (DBRS) assigned provisional ratings to the following notes to be issued by IM SABADELL PYME 11, FT (the Issuer):

-- EUR 1,567.5 million Series A Notes rated at A (high) (sf) (the Series A Notes)
-- EUR 332.5 million Series B Notes rated at 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 Sabadell, S.A. (Sabadell or the Originator) to small- and medium-sized enterprises (SMEs) and self-employed individuals based in Spain. As of 21 November 2017, the transaction’s provisional portfolio consisted of 32,282 loans to 28,999 obligor groups, totalling EUR 2,568.5 million.

At closing, the Originator will select the final portfolio of EUR 1,900.0 million from the above-mentioned provisional pool.

The rating on the Series A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the Legal Maturity Date in June 2057. The rating on the Series B Notes addresses the ultimate payment of interest and principal on or before the Legal Maturity Date.

Interest and principal payments on the Notes will be made quarterly on the 20th of March, June, September and December, with the first payment date on 20 March 2018. The Notes will pay an interest rate equal to Euribor three-month plus a 0.75% and 0.90% margin for the Series A and Series B, respectively.

The provisional pool is well diversified with no significant borrower concentration and relatively low industry concentration. There is concentration to borrowers based in Catalonia (33.2% of the portfolio balance), which is expected given that Catalonia is the home region of the Originator. The top one, ten and 20 borrowers group represent 1.03%, 6.26% and 10.53% of the portfolio balance, respectively. The top three industry sectors by DBRS industry definition include “Building & Development”, “Food Services” and “Business Equipment & Services”, representing 14.96%, 10.81% and 9.66% of the portfolio outstanding balance, respectively.

These ratings are based upon DBRS’s review of the following items:

At closing, the Series A Notes will benefit from a total credit enhancement of 22.40%, which DBRS considers to be sufficient to support the A (high) (sf) rating. The Series B Notes will benefit from a credit enhancement of 4.90%. Credit enhancement will be provided by subordination and the Reserve Fund.

The Reserve Fund has a balance of EUR 93.1 million, 4.90% 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 or at a fund liquidation date.

The transaction does not include any mechanisms to address commingling risk. As such, DBRS’s analysis includes a stress equivalent to the interruption of interest and principal proceeds for a period of six months, assuming that senior expenses and interest on the Series A Notes would be paid from the Cash Reserve for this period.

The portfolio can included loans that resulted from refinancing of existing debt by up to 6.5% of the portfolio initial balance. DBRS did not receive information regarding historical performance of refinanced loans but expects these types of loans to have a higher probability of default (PD) as they can be derived from the refinancing of loans in arrears or doubtful loans. DBRS assumed the refinanced loans had a risk profile equivalent to B (low) rated borrowers, which corresponds to a one-year PD of 10.08%.

The final portfolio can also include loans up to 60 days in arrears. DBRS made a loss adjustment in its cash flow analysis to account for inclusion of loans in arrear for more than 30 days by stressing the loans in arrears in the provisional portfolio to create a conservative estimate of how many migrate to arrears above 30 days.

DBRS determined these ratings as follows, as per the principal methodology specified below:
-- The PD for the portfolio was determined using the historical performance information supplied. DBRS assumed an annualised PD of 1.99% for normal loans and 10.08% for refinanced loans.
-- The assumed weighted-average life (WAL) of the portfolio was 3.65 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 a 49.29% recovery rate for secured loans and a 16.30% recovery rate for unsecured loans. For the Series B Notes, DBRS applied a 66.93% recovery rate for secured loans and a 21.50% recovery rate 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 to the ratings 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 referenced in this transaction are listed at the end of this press release.

These 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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include the parties involved in the ratings, including but not limited to the Originator, Banco 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.

At the time of the initial rating DBRS was supplied with third party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

These ratings concerns newly issued financial instruments. This is the first DBRS rating on this financial instrument.

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

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 1.99% for normal loans and 10.08% for refinanced loans, a 10% increase of the base case and a 20% increase of the base case PD.
-- Recovery Rates Used: Base Case Recovery Rates of 21.23% at the A (high) (sf) stress level and 28.35% 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 decrease of the Base Case Recovery Rates by 20% or a hypothetical increase of the Base Case PD by 20% would lead to a downgrade of the Series A Notes to A (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 not lead to a downgrade of the Series A Notes.

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 historical default rates published by the European Securities and Markets Authority (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 and US regulations only.

Initial Lead Analyst: Carlos Silva, Senior Vice President
Initial Rating Date: 15 December 2017
Initial Rating Committee Chair: Christian Aufsatz, Managing Director

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

--Rating CLOs Backed by Loans to European SMEs
--Legal Criteria for European Structured Finance Transactions
--Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
--Operational Risk Assessment for European Structure Finance Originators
--Operational Risk Assessment for European Structure Finance Servicers
--Unified Interest Rate Model for European Securitisations
--Cash Flow Assumptions for Corporate Credit Securitizations
--Rating 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.