Press Release

DBRS Morningstar Upgrades Ratings on CaixaBank PYMES 12, FT and Removes Under Review with Positive Implications Status

Structured Credit

July 13, 2021

DBRS Ratings GmbH (DBRS Morningstar) upgraded its ratings on the notes issued by CaixaBank PYMES 12, FT (the Issuer) as follows:

-- Series A Notes to AA (sf) from AA (low) (sf)
-- Series B Notes to B (high) (sf) from B (low) (sf)

DBRS Morningstar also removed the ratings from Under Review with Positive Implications (UR-Pos.), where they were placed on 14 April 2021. For more information, please see this press release: https://www.dbrsmorningstar.com/research/376738/dbrs-morningstar-places-nine-ratings-of-seven-european-structured-finance-transactions-under-review-following-an-asset-model-error.

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 September 2062. The rating of the Series B Notes addresses the ultimate payment of interest and principal on or before the legal maturity date.

The upgrades follow an annual review of the transaction and are based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the June 2021 payment date;
-- The one-year base case probability of default (PD) and default and recovery rates on the outstanding receivables;
-- The current available credit enhancement to the Notes to cover the expected losses assumed in line with their respective rating levels;
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic; and
-- The release of DBRS Morningstar’s SME Diversity Model v2.5.0.0.

CaixaBank PYMES 12, FT is a cash flow securitisation collateralised by a portfolio of secured and unsecured loans originated by CaixaBank, S.A. (CaixaBank) to corporates, small and medium-size enterprises (SME), and self-employed individuals based in Spain. The transaction closed in November 2020, with a total portfolio of EUR 2.55 billion.

PORTFOLIO PERFORMANCE
The transaction’s performance has been stable since closing. As of June 2021, loans that were two to three months in arrears represented 0.00% of the outstanding portfolio balance. The 90+ delinquency ratio was 0.40% and the cumulative gross default ratio stood at 0.01% of the original portfolio balance. Receivables are classified as defaulted after 12 months of arrears per the transaction documentation.

As of 31 May 2021, approximately 21% of the portfolio was reported to be currently under principal grace periods, compared with 27% at closing.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool of receivables and updated its recovery rate assumptions to 20.9% and 28.2% at the AA (sf) and B (high) (sf) rating level, respectively.

Following the release of its SME Diversity Model v2.5.0.0, DBRS Morningstar updated its lifetime default assumptions to 25.3% at the AA (sf) rating level, and to 8.9% at the B (high) (sf) rating level.

The base case PD has been updated to 1.9% (including coronavirus adjustments as described below).

CREDIT ENHANCEMENT
The credit enhancements available to the rated notes has increased as the transaction deleverages. As of the June 2021 payment date, the credit enhancements available to the Series A Notes and Series B Notes were 22.0% and 5.8%, respectively (up from 19.0% and 5.0%, respectively, at closing). Credit enhancement is provided by subordination of the Series B Notes and a reserve fund. The reserve fund was funded through a subordinated loan and is available to cover senior fees, interest, and principal payments on the Series A Notes, and once the Series A Notes are fully amortised, interest and principal on the Series B Notes. The cash reserve starts amortising after 12 months from closing, subject to the target level being equal to 5.0% of the outstanding balance of the Series A and Series B notes.

CaixaBank acts as the account bank for the transaction. Based on the account bank reference rating of CaixaBank at A (high), one notch below its DBRS Morningstar Long-Term Critical Obligations Rating of AA (low), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Series A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.

The coronavirus and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that payment holidays and delinquencies may continue to increase in the coming months for many SME transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For this transaction, DBRS Morningstar increased the expected default rate on receivables granted to obligors operating in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus. As per DBRS Morningstar’s assessment, 5.3% and 28.0% of the outstanding portfolio balance represented industries classified in the mid-high and high-risk economic sectors, respectively. This led the underlying one-year PDs to be multiplied by 1.5 times (x) and 2.0x, respectively, as per DBRS Morningstar’s “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary released on 18 May 2020, wherein DBRS Morningstar discussed the overall risk exposure of the SME sector to the coronavirus and provided a framework for identifying the transactions that are more at risk and more likely to be affected by the fallout of the pandemic on the economy. For more details, please see: https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and
https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

DBRS Morningstar also conducted an additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolio.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020–22 period in select economies. These scenarios were last updated on 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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” (28 June 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

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

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include transaction reports and information provided by the Management Company, CaixaBank Titulización, S.G.F.T., S.A.U., and loan-level data provided by the European DataWarehouse GmbH.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial ratings, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar 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 14 April 2021, when DBRS Morningstar placed the ratings on the Notes UR-Pos. following an asset model error.

The lead analyst responsibilities for this transaction have been transferred to Helvia Meana.

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

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine the ratings.

-- PD Used: Base case PD of 1.9% , a 10.0% and 20.0% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 20.9% at the AA (sf) and 28.2% at the B (high) (sf) stress levels, a 10% and 20% decrease in the base case recovery rates, respectively.

DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20% would lead to a confirmation of the Series A Notes at AA (sf) and a confirmation of the Series B Notes at B (high) (sf). A hypothetical decrease of the base case recovery rate by 20%, ceteris paribus, would not have an impact on the Series A Notes rating or the Series B Notes rating. 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 not have an impact on both Series of Notes ratings.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Helvia Meana, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 12 November 2020

DBRS Ratings GmbH
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60311 Frankfurt am Main – Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at:
https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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