DBRS Upgrades and Confirms Ratings of IM Grupo Banco Popular MBS 3, FT and Removes UR-Pos. Status

DBRS Ratings Limited (DBRS) upgraded and confirmed its ratings on the notes issued by IM Grupo Banco Popular MBS 3, FT (IM GBP MBS 3) as follows:

-- Series A notes upgraded to A (high) (sf) from A (low) (sf)
-- Series B notes confirmed at C (sf)

The rating on the Series A notes addresses the timely payment of interest and the ultimate payment of principal payable on or before the final maturity date in December 2058. The rating on the Series B notes addresses the ultimate payment of interest and principal payable on or before the final maturity date.

Additionally, DBRS removed the Under Review with Positive Implications (UR-Pos.) status from the notes.

The rating actions are the result of an annual review of the transaction following the publication of an update to the “European RMBS Insight: Spanish Addendum” methodology on 2 October 2018 where DBRS updated its house price indexation and market value decline rates to reflect data through the third quarter of 2017.

The notes were originally placed UR-Pos. on 30 April 2018, following the upgrade of the Kingdom of Spain’s Long-Term Foreign and Local Currency – Issuer Rating to “A” from A (low). For additional information on the upgrade, please see DBRS’s press release entitled “DBRS Upgrades the Kingdom of Spain to A, Stable Trend”, published on 6 April 2018. The UR-Pos. status of the notes was extended following the publication of the “European RMBS Insight: Spanish Addendum - Request for Comment” on 24 July 2018.

The rating actions are based on the following analytical considerations:
-- The portfolio performance, in terms of delinquencies, defaults and losses.
-- Updated portfolio default rate (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement (CE) to the Series A notes to cover the expected losses at the A (high) (sf) rating level.

IM GBP MBS 3 is a securitisation of Spanish prime residential mortgage loans originated by Banco Popular Español, S.A. and Banco Pastor, S.A., which closed in December 2015. After its acquisition of Banco Popular, Banco Santander SA (Santander) began acting as the servicer of the portfolio.

PORTFOLIO PERFORMANCE AND ASSUMPTIONS
The portfolio is performing within DBRS’s expectations. As of the June 2018 payment date, loans in arrears for over 90 days represented 0.9% of the outstanding collateral portfolio, while the current cumulative default ratio was at 1.7% of the original portfolio balance, up from 0.7% a year ago.

DBRS conducted a loan-by-loan analysis on the remaining collateral pool of receivables and updated its PD and LGD assumptions. The updated base-case PD and LGD are 12.3% and 39.7%, respectively.

The updated assumptions incorporate the Spanish sovereign rating which was upgraded to “A” from A (low) on 6 April 2018, as well as the updated MVDs and HPIs, as per the “European RMBS Insight: Spanish Addendum” published on 2 October 2018.

CREDIT ENHANCEMENT
The CE available to the Series A notes has continued to increase as the transaction deleverages. The Series A notes are supported by the subordination of the Series B notes and a non-amortising reserve fund (RF), which is available to cover senior fees, interest and principal on the Series A notes until the Series A notes are paid in full, after which time the RF will be available to support the Series B notes. As of June 2018, the RF was at its target of EUR 27 million, and the CE to the Series A notes was 29.0%, increasing from 26.6% as of March 2017.

Santander acts as the Account Bank for the transaction. On the basis of Santander’s reference rating of A (high), which is one notch below DBRS’s Long-Term Critical Obligations Rating of AA (low), and the mitigants outlined in the transaction documents, DBRS considers the risk arising from the exposure to Santander to be consistent with the rating of the notes.

Notes:
All figures are in euros unless otherwise noted.

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

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

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

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 reports provided by InterMoney Titulización, S.G.F.T., S.A. and loan-level data provided by the European DataWarehouse GmbH.

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 27 July 2018 when DBRS extended the UR-Pos. status on the Notes.

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):
-- DBRS expected a lifetime base-case PD and LGD for the pool 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 assumptions for the remaining portfolio collateral are 12.3% and 39.7%, respectively. At the A (high) (sf) rating level, the corresponding PD is 30.6% and the LGD is 51.9%.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating on the Series A notes would be expected to remain at A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Series A notes would be expected to remain at A (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and the LGD increase by 50%, the rating on the Series A notes would be expected to remain at A (high) (sf).

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

The Series B notes rating would not be affected by any hypothetical change to either PD or LGD.

For further information on DBRS historic 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: Francesco Amato, Financial Analyst
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 3 December 2015

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The rating methodologies used in the analysis of these transactions can be found at: http://www.dbrs.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- European RMBS Insight Methodology
-- European RMBS Insight: Spanish Addendum
-- Interest Rate Stresses for European Structured Finance Transactions

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.