DBRS Upgrades Ratings on IM Grupo Banco Popular Leasing 3, FT

DBRS Ratings Limited (DBRS) upgraded the following ratings on on IM Grupo Banco Popular Leasing 3, FT (the Issuer):

-- Series A Notes upgraded to AA (sf) from AA (low)
-- Series B Notes upgraded to CCC (sf) from CC (sf)

The upgrades follow an annual review of the transaction and are based on the following analytical considerations:
-- The overall portfolio performance as of the April 2018 payment date, particularly with regard to low levels of delinquencies and cumulative net losses;
-- Updated default rates and expected loss assumptions for the remaining collateral pool, following the upgrade of the Kingdom of Spain’s (Spain) Long-Term Foreign and Local Currency – Issuer Rating to A from A (low);
-- The current available credit enhancement (CE) to the Series A and Series B Notes (the Notes) to cover expected losses assumed in line with the AA (sf) and CCC (sf) rating levels, respectively.

The rating on the Series A Notes addresses the timely payment of interest and ultimate repayment of principal payable on or before the legal maturity date in August 2050. The rating on the Series B Notes addresses the ultimate payment of interest and repayment of principal payable on or before the legal maturity date in August 2050.

The Issuer is a securitisation collateralised by a portfolio of commercial lease contracts granted by Banco Popular Español S.A. (BPE) and Banco Pastor, S.A. (Banco Pastor) to Spanish corporates, small- and medium-sized enterprises (SMEs) and self-employed individuals. The transaction follows the standard structure under the Spanish law and closed in May 2017.

As at 23 April 2018, the balance of the Series A Notes was EUR 539.9 million and the balance of the Series B Notes was EUR 220.0 million. The EUR 759.9 million portfolio (excluding defaulted receivables) includes claims derived from commercial real estate (23.2%) and non-real estate leases (76.8%).

PORTFOLIO PERFORMANCE
As at the April 2018 payment date, contracts delinquent by one, two and three months represented 1.1%, 0.8% and 0.5% of the outstanding portfolio, respectively, while delinquencies greater than three months were 1.7%. Gross cumulative defaults were EUR 116,393.8.

PORTFOLIO ASSUMPTIONS
DBRS kept its expected probability of default (PD) and its base case recovery rate (RR) assumptions at 6.8% and 13.1%, respectively. However, the sovereign-ajusted PD and RR assumptions have been updated to 7.0% and 13.1%, reflecting DBRS’s upgrade of Spain’s Long-Term Foreign Currency rating to A with a Stable trend on 6 April 2018 (see DBRS’s press release entitled “DBRS Upgrades the Kingdom of Spain to A, Stable Trend”).

CREDIT ENHANCEMENT
CE for the Series A Notes is provided by the subordination of the Series B Notes and the Reserve Fund, while CE for the Series B Notes is provided by the reserve fund. As at the April 2018 payment date, Series A Notes’ CE was 33.3% and Series B Notes’ CE was 4.3%, up from 23.0% and 3.0%, respectively, in May 2017. The CE increase has prompted rating upgrades.

The transaction structure includes a EUR 33.3 million non-amortising reserve fund, which is available to cover senior expenses and missed payments (interest and principal) on the Series A Notes; following the full repayment of the Series A Notes, this account will be available to cover any payment shortfalls on the Series B Notes.

Banco Santander SA (Santander) is the Issuer’s account bank. The account bank reference rating of A (high), which is one notch below the DBRS’s Long-Term Critical Obligations Rating of Santander at AA (low), is consistent with the Minimum Institution Rating, given the ratings assigned to the Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology”.

DBRS has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

A review of the transaction’s legal documents was not conducted as the legal documents have remained unchanged since the most recent rating actions.

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 investor reports provided by InterMoney Titulización S.G.F.T., S.A. (the Management Company).

DBRS did 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 these ratings to be of satisfactory quality.

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

The last rating action on this transaction took place on 18 May 2017, when DBRS finalised the provisional ratings previously assigned to the Notes.

The lead responsibilities for this transaction have been transferred to Joana Seara da Costa.

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 rating (the Base Case):

-- DBRS expected a base case PD and loss given default (LGD) for the portfolio based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.

-- The base case PD and LGD of the current pool of receivables are 6.1% and 86.9%, respectively, excluding sovereign stress.

-- The Risk Sensitivity below illustrates the ratings expected for the Notes if the PD and LGD increase by certain percentages over the base case assumptions. For example, if the LGD increases by 50%, the rating on the Series A Notes would be expected to remain at AA (sf) and the rating on the Series B Notes would be expected to remain at CCC (sf), all else being equal. If the PD increases by 50%, the the rating on the Series A Notes would be expected to decrease to AA (low) (sf) and the rating on the Series B Notes would be expected to decrease to CC (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating on the Series A Notes would be expected decrease to A (high) (sf) and the rating on the Series B Notes would be expected to decrease to CC (sf), all else being equal.

Series A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Series B Notes risk sensitivity:
-- 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in LGD, expected rating of CCC (sf)
-- 25% increase in PD, expected rating of CCC (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of CC (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CC (sf)
-- 50% increase in PD, expected rating of CC (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of CC (sf)

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: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 16 May 2017

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.

-- Master European Structured Finance Surveillance Methodology
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers

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.