DBRS Finalises Provisional Ratings of IM BCC Capital 1, FT

DBRS Ratings Limited (DBRS) finalised its provisional ratings of the following notes issued by IM BCC Capital 1, FT (the Issuer):

-- EUR 602.7 million Class A Notes rated AA (sf)
-- EUR 226.4 million Class B Notes rated BBB (sf)
-- EUR 64.3 million Class C Notes rated BB (sf) (together with the Class A and the Class B Notes, the Notes)

DBRS did not rate the Class D and Class E 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 11 November 2018, the transaction’s provisional portfolio consisted of 27,275 loans to 22,032 obligor groups, totalling EUR 1,122.6 million.

At closing, the Originator selected the final EUR 953.0 million portfolio from the provisional pool mentioned above.

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the legal maturity date in April 2037. The ratings on the Class B Notes and Class C Notes address 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 22nd of January, April, July and October with the first payment date on 22 April 2019. The Notes pay a fixed interest rate that was determined on the pricing date of the transaction.

The pool exhibits low borrower concentration levels. The largest obligor group represents only 0.44% of the portfolio balance and the top ten and top 20 borrowers represent 2.66% and 4.08% of the outstanding pool balance, respectively. As per DBRS’s Industry classification, the pool exhibits a high industry concentration in Farming/Agriculture, which represents 50.19% of the pool balance, followed by Surface Transport and Business Equipment and Services at 7.20% and 5.48%, respectively. There is a high concentration of borrowers in Andalusia, Spain (38.82% of the portfolio balance), which is expected given that Andalusia is the home region of the Originator.

At closing, the Class A Notes benefit from a total credit enhancement of 38.8% (the Credit Enhancement for Class A is equal to the aggregate of the portfolio and the Cash Reserve minus the balance of the Class A notes: [EUR 953.0 million + EUR 19.1 million – EUR 602.7 million] / EUR 953.0 million), which DBRS considers sufficient to support the AA (sf) rating. The Class B Notes and Class C Notes benefit from credit enhancement of 15.0% and 8.3%, respectively, which DBRS considers sufficient to support the BBB (sf) and BB (sf) ratings, respectively. The Class D Notes benefit from a total credit enhancement of 2.00%. Credit enhancement is provided by subordination and the Class E Notes as the Reserve Fund.

The EUR 19.1 million Reserve Fund is 2.00% of the aggregate balance of the Class A to Class D Notes and is available to cover shortfalls in the senior expenses and interest and principal of the Class A to Class D Notes.

The transaction includes mechanisms to address commingling risk. On the closing date, the Issuer has deposited a Commingling Reserve Amount to mitigate any potential disruptions of the payment of senior expenses and interest on the Class A Notes. On top of this, the Issuer has signed an agreement on the closing date to appoint a backup servicer that will substitute the Servicer under specific circumstances within 90 days.

DBRS determined these ratings based on a review of the following analytical considerations, as per the principal methodology specified below:
--The Class A, B, C and D notes amortise on a pro rata basis unless certain sequential amortisation events are breached. Unlike sequential amortisation structures, pro rata amortisation structures do not allow senior notes to benefit from an increase in relative credit enhancement as the portfolio pays down to compensate for the risk of shifts in portfolio. As such, the pro rata amortisation can expose the rated notes to increase in portfolio obligor and industry concentrations, particularly when defaults are back-loaded. To address this risk, DBRS modelled the structure assuming defaults are delayed by one to two years to test its ability to repay the notes considering significant proceeds were used to pay principal on Class B, C and D.

--The portfolio benefits from positive selection due to the fact that loans with a Cajamar internal rating of 5 or better can be included in the portfolio. The probability of default (PD) for the portfolio was determined using the historical performance information supplied for loans with a rating of 5 or better. The historical performance data is divided into four segments: SME secured, SME unsecured, Self-employed secured and Self-employed unsecured. The dataset was limited to a period of five years dating back to Q1 2013. The data does not capture downturn periods of an economic cycle. DBRS used proxy data to estimate expected stressed performance during adverse economic periods when determining its base case PDs for each segment provided. DBRS assumed a weighted-average annualised PD of 2.15% for this portfolio while the weighted-average annualised PD for the segments SME secured, SME unsecured, Self-employed secured and Self-employed unsecured was 4.70%, 2.66%,1.15% and 1.07%, respectively.

-- The assumed weighted-average life (WAL) of the portfolio was 4.17 years.
-- The PD and WAL were used in the DBRS Diversity Model
to generate the hurdle rates for the assigned ratings.
-- The recovery rate was determined by considering the market value declines for Spain, the security level and collateral type. For the Class A Notes, DBRS applied a 43.1% recovery rate for secured loans and a 15.8% recovery rate for unsecured loans. For the Class B Notes, DBRS applied a 58.1% recovery rate for secured loans and a 17.0% recovery rate for unsecured loans. Lastly, for the Class C Notes, DBRS applied a 64.8% recovery rate for secured loans and a 21.5% 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 Arranger, Banco Santander 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 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 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”):
-- PD Rates Used: Base Case PD of 1.1%, 2.7%, 1.2% and 4.7% for segments 1.2%, 2.9%, 1.3% and 5.2% and 1.3%, 3.2%, 1.4% and 5.6 respectively, a 10% and a 20% increase of the base case PD.
-- Recovery Rates Used: Base Case Recovery Rates, a 10% and 20% decrease in the Base Case Recovery Rates. The Base Case Recovery Rates used are 23.4% at both AA (sf), 28.5% at the BBB (sf) stress level and 33.7% at the BB (sf) for the Class A Notes, Class B Notes and Class C Notes, respectively.

DBRS concludes that, in relation to the Class A Notes, a hypothetical increase of the base case PD by 20% would lead to a downgrade of the Class A Notes to AA (low) (sf). A hypothetical decrease of the Recovery Rate by 20% would lead to a confirmation of the Class A Notes at AA (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would each lead to a confirmation of the Class A Notes at AA (sf).

Regarding the Class B Notes, a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would each lead to a confirmation of the Class B Notes at BBB (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a confirmation of the Class B Notes at BBB (sf).

With reference to the Class C Notes, a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would each lead to a confirmation of the Class B Notes at BB (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a confirmation of the Class B Notes at BB (sf).

It should be noted that 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
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 10 December 2018

DBRS Ratings Limited
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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 Structured Finance Originators
--Operational Risk Assessment for European Structured 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.