DBRS Finalises Ratings of IM BCC Cajamar PYME 2, FT

DBRS Ratings Limited (DBRS) finalised its ratings on the following notes issued by IM BCC Cajamar PYME 2, FT (the Issuer):

-- EUR 760.0 million Series A Notes rated at A (high) (sf)
-- EUR 240.0 million Series B Notes rated at CC (sf) (together with the Series A Notes, the Notes)

The transaction is a cash flow securitisation collateralised by a portfolio of term loans originated by Cajamar Caja Rural, S.C.C (Cajamar or the Originator) to small- and medium-sized enterprises and self-employed individuals based in Spain. As of 25 April 2018, the transaction’s securitised portfolio consisted of 18,622 loans to 15,168 obligor groups, totalling EUR 1,000 million.

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 monthly on the 22nd of each month, with the first payment date on 22 June 2018. The Notes will pay a fixed interest rate equal to 0.5% until 22 November 2019. After that, the Notes will pay an interest rate of Euribor one-month plus a 0.20% and 0.30% margin for the Series A and Series B notes, respectively.

The final pool exhibits low borrower concentration. The largest obligor group represents 0.60% of the portfolio balance and the top ten and top twenty borrowers represent 4.85% and 8.02% of the outstanding pool balance, respectively. As per DBRS’s Industry classification, the pool exhibits a high industry concentration in Farming/Agriculture, which represents 29.59% of the pool balance, followed by Food/Drug retailers and Food Products at 8.12% and 6.78%, respectively. There is a high concentration of borrowers in Andalusia (30.24% of the portfolio balance), which is expected given that Andalusia is the home region of the Originator. Additionally, 13.05% of the outstanding balance of the portfolio corresponds to refinance loans, which have a higher default expectation.

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

The Series A Notes benefit from a total credit enhancement of 27.00%, which DBRS considers to be sufficient to support the A (high) (sf) rating. The Series B Notes benefit from a credit enhancement of 3.00%. Credit enhancement will be provided by subordination and the Reserve Fund.

The Reserve Fund has a balance of EUR 30.0 million, 3.00% of the aggregate balance of the Notes, and is available to cover shortfalls in the senior expenses and interest in the Series A Notes. Once the Series A Notes are fully paid, the Reserve Fund will be available to cover 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.

DBRS determined these ratings as follows, as per the principal methodology specified below:
-- The probability of default (PD) for the portfolio was determined using the historical performance information supplied. The historical data has been provided separately for refinance loans and “normal” loans. DBRS compared the historical data analysis with the internal PD distribution of the portfolio and concluded that the portfolio credit quality was worse than the bank’s loan book which was used for historical performance data. DBRS adjusted the annual PD for the loans of the portfolio that have lower internal ratings (i.e., ratings 0, 1 and 2) considering as defaulted from day one loans with a 0 and 1 rating and a PD of 20.0% for those loans with a rating of 2. For the remaining portfolio, DBRS assumed an annual PD of 2.18% for the standard loans and an annual PD of 7.22% for refinance loans based on the historical performance data provided.
-- The assumed weighted-average life (WAL) of the portfolio was 5.26 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 for Spain, the security level and type of the collateral. For the Series A Notes, DBRS applied a 54.79% recovery rate for secured loans and a 16.30% recovery rate for unsecured loans. For the Series B Notes, DBRS applied a 73.62% 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 tool.

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, Cajamar, Caja Rural S.C.C, 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 concern newly issued financial instruments. These are the first DBRS ratings 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 2.18% for standard loans and 7.22% 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 28.10% at the A (high) (sf) stress level for the Class A Notes, 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 BBB (high) (sf), and a hypothetical decrease of the recovery rate by 20% would lead to a downgrade of the Series A Notes to BBB (high) (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 BBB (high) (sf).

Regarding the Series B Notes, the rating would not be affected by any hypothetical change in neither PD nor Recovery Rate.

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.

Lead Analyst: María López, Vice President
Initial Rating Date: 24 April 2018
Rating Committee Chair: Jerry van Koolbergen, Managing Director

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY 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.

--Rating CLOs Backed by Loans to European SMEs
--Legal Criteria for European Structured Finance Transactions
--Operational Risk Assessment for European Structure Finance Originators
--Operational Risk Assessment for European Structure Finance Servicers
--Interest Rate Stresses for European Structured Finance Transactions
--Cash Flow Assumptions for Corporate Credit Securitizations
--Rating CLOs and CDOs of Large Corporate Credit
--European RMBS Insight Methodology
--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.

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