DBRS Morningstar Confirms Rating on Secucor Finance 2021-1 DAC

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (sf) rating on the Class A Notes issued by Secucor Finance 2021-1 DAC (the Issuer).

The rating addresses the timely payment of interest and the ultimate payment of principal by the final maturity date in July 2032.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the February 2023 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- The current available credit enhancement to the Class A Notes to cover the expected losses at the AA (sf) rating level; and
-- No amortisation events or breach of concentration limits occurred to date.

The transaction is a revolving securitisation of amortising consumer loans, store card-charge loans, and revolving credit facilities granted to customers of the El Corte Inglés S.A. group in Spain. The portfolio is serviced by the captive finance company of the group, Financiera El Corte Inglés E.F.C., S.A. (Financiera El Corte Inglés).

The transaction is structured with a 36-month revolving period scheduled to end in July 2024, and features borrowing base calculations and dynamic credit enhancement from the Class B Variable Funding Notes (VFN). Additionally, various reserves and excess spread provide support to the Class A Notes. There is a yield reserve for interest-free loans to cover the servicing fees and interest on the Class A Notes, and a dilution reserve floored at 3% to cover merchandise disputes, rebates, and frauds. Additionally, there is a loss reserve based on the weighted-average (WA) loss reserve factor of each loan type that determines, together with the dilution reserve, the asset factor. The asset factor is used to derive the maximum Class A advance. As the asset factor has a floor of 9%, the Class A Notes will have at least 8.3% subordination support from the Class B VFN minimum amount.

PORTFOLIO PERFORMANCE
As of the 31 January 2023 portfolio cut-off date, delinquencies were low, with 60- to 90-day and 90+-day arrears representing 0.3% and 0.5% of the outstanding portfolio balance, respectively, slightly up from 0.2% and 0.3% as at 28 February 2022. The gross cumulative default ratio stood at 0.2% of the initial portfolio, up from 0.1% at the last annual review.
The following triggers are within the limits:
-- Minimum borrowing base trigger,
-- Principal retention trigger,
-- Class A reserve fund trigger,
-- Delinquency trigger,
-- Default trigger,
-- WA maturity triggers for the various products and on an aggregate portfolio basis, and
-- Dilution trigger.

The yield reserve, dilution reserve, and loss reserve were 0.4%, 3.0%, and 14.9%, respectively, resulting in an asset factor of 21.7%. This brings the minimum subordination to 17.9%, well below the current subordination of 38.2% from which the Class A Notes benefits.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the outstanding pool of receivables and maintained its base-case PD and LGD assumptions at 4.4% and 85.0%, respectively. DBRS Morningstar continues to base its analysis on worst-case portfolios constructed to address potential migration toward the riskiest products during the revolving period.

CREDIT ENHANCEMENT
The Class A Notes benefit from subordination provided by the dynamically funded Class B VFN. The subordination is above the minimum level and has increased to 38.2% from 28.6% at the last annual review.

The transaction benefits from a reserve that is available to cover shortfalls in senior expenses and interest on the Class A Notes. The reserve required amount is 0.75% of the outstanding Class A Notes balance with a floor of 0.07% of the Class A Notes’ balance at the start of the amortisation period. As of the February 2023 payment date, the cash reserve was at its target of EUR 5.6 million.

Banco Santander SA (Santander) acts as the account bank for the transaction. Based on the A (high) reference rating on Santander (one notch below its Long Term Critical Obligations Rating of AA (low)), the downgrade provisions outlined in the transaction documents, and the structural mitigants 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 Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant impact on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

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 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 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/401817/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include monthly reports provided by Financiera El Corte Inglés.

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

At the time of the initial rating, 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 this rating 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 25 March 2022, when DBRS Morningstar confirmed its AA (sf) rating on the Class A Notes.

The lead analyst responsibilities for this transaction have been transferred to Pascale Kallas.

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):

--DBRS Morningstar 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 of the current pool of loans for the Issuer are 4.4% and 85.0%, respectively.

-- 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 PD increases by 50%, the rating on the Class A Notes would be expected to fall to A (sf), assuming no change in the LGD. If the LGD increases by 100%, the rating on the Class A Notes would be expected to remain at AA (sf), assuming no change in the PD. Furthermore, if the PD increases by 50% and the LGD increases by 100%, the rating on the Class A Notes would be expected to fall to A (sf).

Class A Notes Risk Sensitivity
-- 100% LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 100% LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 100% LGD, expected rating of A (sf)

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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pascale Kallas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 15 July 2021

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

-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
--Rating European Consumer and Commercial Asset-Backed Securitisations (19 October 2022), https://www.dbrsmorningstar.com/research/404212/rating-european-consumer-and-commercial-asset-backed-securitisations.
--Rating European Structured Finance Transactions Methodology (15 July 2022), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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].