DBRS Assigns Provisional Ratings to IM Grupo Banco Popular Empresas VII, FT

DBRS Ratings Limited (DBRS) has today assigned provisional ratings to the following notes issued by IM Grupo Banco Popular Empresas VII, FT (the Issuer):

-- EUR 1,825 million Series A Notes, rated A (high) (sf) (the Series A Notes)
-- EUR 675 million Series B Notes, rated CC (sf) (the Series B Notes; together, the Notes).

The transaction is a cash flow securitisation collateralised by a portfolio of term loans originated by Banco Popular Español, S.A. (Banco Popular or the Originator) and Banco Pastor, S.A.U (Banco Pastor or the Originator and with Banco Popular, the Originators) to small and medium-sized enterprises and self-employed individuals based in Spain. Banco Pastor is a wholly-owned subsidiary of Grupo Banco Popular. As of 15 October 2016, the transaction’s provisional portfolio included 33,600 loans to 27,153 obligor groups, totalling EUR 2,979 million.

At closing, the Originator will select the initial portfolio of EUR 2,500 million from the provisional pool.

The transaction has a two-year revolving period, during which Banco Popular and Banco Pastor have the option to sell new loans at par to the Issuer as long as the eligibility criteria is complied with. The revolving period will end prematurely after the occurrence of certain events (Replenishment Termination Events), including the cumulative default rate or cumulative delinquency rate exceeding 5.0% and 5.0% of the initial portfolio balance, respectively.

The rating on the Series A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Final Date. The Final Date is defined as the next Payment Date after 42 months of the maturity of the last loan. The rating on the Series B Notes addresses the ultimate payment of interest and the ultimate payment of principal on or before the Final Date.

Interest and principal payments on the Notes will be made quarterly on the 22nd of March, June, September and December, with the first interest payment date on 22 March 2017. The Notes will pay an interest rate equal to three-month Euribor, plus a 0.40% margin and 0.50% for Series A and Series B, respectively.

These ratings are based on DBRS’s review of the following items:
-- The Eligibility Criteria, based on which DBRS has created a worst-case portfolio.
-- The fixed loans of the portfolio could increase up to 50.0% of the total portfolio, in this case and in a scenario in which interest rates go up, the transaction could incur in a significant interest rate risk.
-- The transaction structure, the form and sufficiency of available credit enhancement and the portfolio characteristics.
-- At closing, the Series A Notes benefit from a total credit enhancement of 31.0% that DBRS considers to be sufficient to support the A (high) (sf) rating. The Series B Notes benefit from a credit enhancement of 4.0% that DBRS considers to be sufficient to support the CC (sf) rating. Credit enhancement is provided by subordination and the Reserve Fund.
-- The Reserve Fund is non-amortising for the life of the transaction. The Reserve Fund has a balance of EUR 100.0 million, 4.0% of the aggregate balance of the Notes, and is available to cover shortfalls in the senior expenses and interest in the Series A Notes and once the Series A Notes are fully paid, interest on Series B throughout the life of the Notes. The Reserve Fund will only be available as a credit support for the Notes at the Final Date.
-- DBRS considers that there are inadequate mitigants to the commingling risk. To address this risk, DBRS analysis includes a stress equivalent to the interruption of interest and principal proceeds for a period of six months by assuming senior expenses and interest on the Series A Notes would be paid from the Reserve Fund for this period.

DBRS determined these ratings as follows, as per the principal methodology specified below:
-- The probability of default for the portfolio was determined using the historical performance information supplied in 2015, instead of the historical data sent for this transaction. The most recent historical performance dataset would have suggested a significant improvement to historical performance that is, in DBRS’s view, not expected nor consistent with the historical information we received for previous Banco Popular transactions. DBRS assumed an annualised probability of default (PD) of 2.56% for this portfolio.
-- The assumed weighted-average life (WAL) of the portfolio was 5.23 years based on the maximum allowed under the replenishment criteria, three years, plus two years of revolving period and permitted variations along the life of the transaction.
-- The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the target ratings.
-- DBRS applied the following recovery rates: 16.3% for the Series A Notes and 21.5% for Series B Notes as the portfolio is composed exclusively by senior unsecured loans.
-- The break-even rates for the interest rate stresses and default timings were determined using the DBRS cash flow model.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable 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 and criteria referenced in this transaction are listed at the end of this press release.

All DBRS methodologies can be found on www.dbrs.com at http://www.dbrs.com/about/methodologies.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisation in the Euro Area” commentary at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for these ratings include the parties involved in the ratings, including but not limited to the Originators, Banco Popular Español, S.A. and Banco Pastor, S.A.U., 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; DBRS was supplied with third party assessments. However, this did not impact the rating analysis.

DBRS determined key inputs used in its analysis based on historical performance data provided for the Originators and Servicers as well as analysis of the current economic environment. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Further information on DBRS’s analysis of this transaction will be available in a rating report on http://www.dbrs.com or by contacting us at info@dbrs.com.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

These ratings concern newly issued financial instruments.

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):
-- Probability of Default Rates Used: Base Case PD of 2.56%, a 10% increase of the Base Case and a 20% increase of the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rates of 16.3% at the A (high) (sf) stress level for the Class A Notes, a 10% and 20% decrease in the Base Case Recovery Rates.

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 (low) (sf), and a hypothetical decrease of the recovery rate by 20% would lead to a downgrade of the Series A Notes to A (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 Series A Notes to A (low) (sf).

Regarding the Series B Notes, the rating would not be affected by any hypothetical change in neither PD nor Recovery Rate.

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’s historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository see
http://cerep.esma.europa.eu/cerepweb/statistics/defaults.xhtml.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: María López, Vice President
Initial Rating Date: 29 November 2016
Initial Rating Committee Chair: Jerry van Koolbergen, Managing Director

DBRS Ratings Limited
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The rating methodologies and criteria 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 Structure Finance Originators
-- Operational Risk Assessment for European Structure Finance Servicers
-- Unified Interest Rate Model for European Securitisations
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Rating Methodology for CLOs and CDOs of Large Corporate Credit

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.