DBRS Assigns Provisional Ratings to CaixaBank PYMES 10, FT

DBRS Ratings Limited (DBRS) assigned provisional ratings to the following notes issued by CaixaBank PYMES 10, FT (the Issuer):

-- EUR 2,793.0 million Series A Notes rated AA (low) (sf) (the Series A Notes)
-- EUR 532.0 million Series B Notes rated CCC (sf) (the Series B Notes; together with the Series A Notes, the Notes)

The transaction is a cash flow securitisation collateralised by a portfolio of secured and unsecured loans and drawdowns of secured and unsecured lines of credit originated by CaixaBank, S.A. (CaixaBank or the Originator) to small and medium-sized enterprises and self-employed individuals based in Spain. As of 23 October 2018, the transaction’s provisional portfolio included 65,807 loans and drawdowns of secured and unsecured lines of credit to 57,714 obligor groups, totalling EUR 3,466 million.

At closing, the Originator will select the final portfolio of EUR 3,325 million from the provisional pool.

The rating of the Series A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Legal Maturity Date in October 2051. The rating of the Series B Notes addresses the ultimate payment of interest and the ultimate payment of principal on or before the Legal Maturity Date in October 2051.

Interest and principal payments on the Notes will be made quarterly on the 25th of January, April, July and October, with the first payment date on 25 April 2019. The Notes will pay an interest rate equal to three-month Euribor plus 1.00% and 1.25% for the Series A Notes and Series B Notes, respectively.

The provisional pool presents relatively low industry concentration and is well diversified in terms of borrowers. There is some concentration of borrowers in Catalonia (30.4% of the portfolio balance), which is to be expected given that Catalonia is the Originator’s home region. The top ten, twenty and 30 obligor groups represent 4.6%, 7.0% and 9.0% of the portfolio balance, respectively. The top three industry sectors according to DBRS’s industry definition are Building & Development, Business Equipment & Services and Farming & Agriculture, representing 22.5%, 9.5% and 9.2% of the portfolio outstanding balance, respectively.

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

-- The transaction structure, form and sufficiency of available credit enhancement and portfolio characteristics.
-- At closing, the Series A Notes benefit from total credit enhancement of 20.75%, which DBRS considers to be sufficient to support the AA (low) (sf) rating. The Series B Notes benefit from credit enhancement of 4.75%, which DBRS considers to be sufficient to support the CCC (sf) rating. Credit enhancement is provided by subordination and the Reserve Fund.
-- The Reserve Fund will be allowed to amortise after the first year if certain conditions relating to the performance of the portfolio and deleveraging of the transaction have been met.
-- The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting and servicing practices.

DBRS determined these ratings as follows, per the principal methodology specified below:

-- The probability of default (PD) for the portfolio was determined using the historical performance information supplied. DBRS compared the internal rating distribution of the portfolio with the internal rating distribution of the loan book and concluded that the portfolio was of marginally better quality than the overall loan book. DBRS determined the portfolio PD using the historical performance information supplied. DBRS assumed an annualised PD of 1.0% for secured loans and 3.1% for unsecured loans.
-- The assumed weighted-average life (WAL) of the portfolio is 3.9 years.
-- The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the respective ratings.
-- The recovery rate was determined by considering the market value declines for Spain, the security level and the type of collateral. For the Series A Notes, DBRS applied the following recovery rates: 55.6% for secured loans and 15.8% for unsecured loans. For the Series B Notes, DBRS applied the following recovery rates: 71.9% 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 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, CaixaBank, the Issuer, and CaixaBank Titulización S.G.F.T., S.A.

DBRS did 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 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.

These ratings concern a newly issued financial instrument. These are DBRS’s first ratings on this financial instrument.

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):
-- PD Rates Used: Base Case PD of 1.0% for secured loans and 3.2% for unsecured loans, a 10% increase of the base case and a 20% increase of the base case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 26.4% at the AA (low) (sf) and 34.9% at the CCC (sf) stress levels, a 10% and 20% decrease in the Base Case Recovery Rate, respectively. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

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 downgrade of the Series B Notes to CCC (low). A hypothetical decrease of the Base Case Recovery Rate by 20%, ceteris paribus, would lead to a downgrade of the Series A Notes to A (high) (sf) and a downgrade of the Series B Notes to CCC (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 Class A Notes to A (high) (sf) and a downgrade of the Class B Notes to CCC (low) (sf), respectively.

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: Carlos Silva, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 20 November 2018

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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
-- Interest Rate Stresses for European Structured Finance Transactions
-- Rating CLOs and CDOs of Large Corporate Credit
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- 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.