DBRS Morningstar Confirms Credit Rating on Alhambra SME Funding 2019-1 DAC

DBRS Ratings GmbH (DBRS Morningstar) confirmed its CCC (sf) credit rating on the Class C Notes issued by Alhambra SME Funding 2019-1 DAC (the Issuer).

The credit rating on the Class C Notes addresses the ultimate payment of interest and principal on or before the legal final maturity date.

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 18 August 2023;
-- Lifetime portfolio default rates, recovery rates, and expected loss assumptions on the remaining loans; and
-- Current available credit enhancement (CE) to the Class C Notes to cover the expected losses at the CCC (sf) credit rating level.

The transaction is a securitisation collateralised by a portfolio of loans granted to Spanish small and medium-size enterprises and middle-market corporations. The loans were originated by Aptimus Capital Partners (Ireland) Limited and first warehoused at Be-Spoke Loan Funding DAC, which then sold the portfolio to the Issuer. Aptimus Capital Partners (London) Limited (ACPL) acts as the servicer to the Issuer.

The name changes to Aptimus Capital Partners from Be-Spoke Capital occurred in February 2023. In June 2023, ACPL took over the roles of loan administrator, cash administrator, and calculation agent from BNP Paribas London Branch.

The portfolio is static, and the loans were initially interest only with principal payments scheduled to start after August 2021. The transaction closed on 21 November 2019, and the legal final maturity date is 30 November 2028.

PORTFOLIO PERFORMANCE
As of 18 August 2023, 21 loans had defaulted since closing, raising the cumulative outstanding defaulted balance to EUR 105.5 million, or 38.4% of the initial portfolio balance, up from 37.6% at the last annual review. As of 18 August 2023, the portfolio’s average credit quality measured by the DBRS Morningstar Risk Score stood at 30.6% (excluding the defaulted loans) compared with 31.8% at the last annual review. As of 18 August 2023, the portfolio had two borrowers with a credit estimate equivalent to a CCC (high) credit rating (excluding defaulted loans), representing 15.2% of the outstanding portfolio balance, up from 14.7% at the last annual review.

The portfolio exhibits high borrower concentration, with the top 10 borrowers representing 79.8% of the outstanding portfolio balance (excluding defaulted loans), up from 58.4% at the last annual review. The portfolio also exhibits a high geographic concentration, with the largest exposures in Madrid and Aragon, representing 47.7% and 13.9% of the outstanding portfolio balance, respectively (excluding defaulted loans), up from 32.1% and 16.0%, at the last annual review.

The increases in the borrower and geographic concentrations reflect the amortisation of the portfolio. The entire portfolio (excluding defaulted loans), save for one loan, is amortising compared with the last annual review, where approximately half of the portfolio hadn’t started to amortise yet. The portfolio balance (excluding defaulted loans) is approximately EUR 45.3 million, down from EUR 112.0 million at the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the performing pool of receivables as well as the defaulted loans. According to the transaction documentation, the defaulted status of the loan is not reversible despite the defaulted loan meeting payments according to a restructuring plan, for example. DBRS Morningstar considered approximately EUR 19.0 million in defaulted loan balance as reperforming, increasing the portfolio balance of performing loans to EUR 64.3 million from EUR 45.3 million, if reperforming loans were excluded.

Restructured loans with high balloon payment beyond the legal final maturity date of the transaction were not considered in DBRS Morningstar asset analysis. However, restructured loans that were meeting their interest and principal payment plans were considered in the DBRS Morningstar cash flow analysis, but any principal payments beyond the legal final maturity date of the transaction were not considered. DBRS Morningstar excluded from its asset and cashflow analysis loans without a restructuring plan, and/or where the borrower was in court proceedings.

The DBRS Morningstar Risk Score of the performing portfolio including the reperforming loans of EUR 19.0 million was conservatively assessed at 34.9%, up from 31.8% at the last annual review, which was based on the performing portfolio excluding all defaulted loans. DBRS Morningstar does not receive financial information anymore once the loan status becomes defaulted, therefore the DBRS Morningstar Risk Score for the reperforming loans is based on the last available credit estimate before the loan becomes defaulted. The weighted-average life (WAL) on the performing portfolio including the reperforming loans decreased to 0.8 year from 1.0 year on the performing portfolio excluding all defaulted loans at the last annual review. DBRS Morningstar maintained its recovery rate assumptions at 19.4% at the CCC (sf) credit rating level.

CREDIT ENHANCEMENT
The CE consists of overcollateralisation and is calculated based on the outstanding portfolio balance (excluding defaulted loans) of EUR 45.3 million. As of the August 2023 payment date, the CE to the Class C Notes decreased to -16.9% from -12.3% at the last annual review, which is due to the additional defaulted loans. However, the Class C Notes’ CE would increase to 17.6% if the portfolio balance of EUR 64.3 million (including the reperforming loans) were to be considered.

The transaction benefits from a principal deficiency ledger (PDL) mechanism, whereby a PDL debit allocated to each class of notes records the outstanding balance of the loan at the time of default in the junior order of priority and interest is diverted from the interest waterfall to the principal waterfall to amortise the notes in sequential order of seniority. As of the August 2023 payment date, the Class C, Class D, Class E, Class Z1, and Class Z2 Notes’ PDLs stood at EUR 7.7 million, EUR 23.6 million, EUR 13.8 million, EUR 19.3 million, and EUR 8.3 million, respectively (EUR 72.7 million in total).

The transaction benefits from a liquidity reserve available to cover senior expenses and interest on the Class A to Class D notes as well as to cure all the PDLs, although it remained unfunded since the July 2020 payment date. However, the liquidity risk is mitigated by the interest payments on the Class C Notes being deferrable and due by the legal final maturity date and payments related to the transaction fees being minimal (less than EUR 10,000 monthly). Currently there is no deferred interest on the Class C Notes and all the excess spread cures the Class C Notes PDL.

BNP Paribas S.A. Sucursal en Espana (previously BNP Paribas Securities Services, Spanish Branch) (BNP Spain) acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on BNP Spain, 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 Class C Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar’s credit rating on the Class C Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The DBRS Morningstar short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure with its proprietary cash flow engine.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: “Rating CLOs and CDOs of Large Corporate Credit” (7 February 2023), https://www.dbrsmorningstar.com/research/409498/rating-clos-and-cdos-of-large-corporate-credit.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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.

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.

The sources of data and information used for this credit rating include monthly portfolio, note valuation reports, notifications, and additional information provided by ACPL.

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

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

DBRS Morningstar considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating actions on this transaction took place on 19 May 2023 and 3 August 2023, when DBRS Morningstar discontinued the credit ratings on the Class A and Class B notes, respectively, following their repayment in full. Previously, on 21 September 2022, DBRS Morningstar downgraded the Class A and Class C notes to AA (high) (sf) and CCC (sf), respectively, from AAA (sf) and B (low) (sf), respectively, and confirmed the credit rating on the Class B Notes at AA (low) (sf).

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

No sensitivity analysis was conducted regarding the Class C Notes as its credit rating of CCC (sf) is in the very highly speculative range.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 29 October 2019

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

-- Rating CLOs and CDOs of Large Corporate Credit (7 February 2023) and the CLO Asset Model v2.2.3.1,
https://www.dbrsmorningstar.com/research/409498/rating-clos-and-cdos-of-large-corporate-credit
-- Master European Structured Finance Surveillance Methodology (7 February 2023),
https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology
-- Rating CLOs Backed by Loans to European SMEs (10 June 2022),
https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes
-- Cash Flow Assumptions for Corporate Credit Securitizations (7 February 2023),
https://www.dbrsmorningstar.com/research/409499/cash-flow-assumptions-for-corporate-credit-securitizations
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023),
https://www.dbrsmorningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023),
https://www.dbrsmorningstar.com/research/416784/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].