DBRS Takes Rating Actions on IM Sabadell RMBS 2 FTA

DBRS Ratings Limited (DBRS) has today downgraded the rating on the Class A Notes issued by IM Sabadell RMBS 2 FTA (the Issuer) to A (sf) from AA (sf). DBRS also placed the Class A Notes Under Review with Negative Implications (UR-Neg).

The downgrade and UR-Neg status of the Class A Notes reflect an entire review of the transaction based on the following analytical considerations:
-- Changes on the composition of the current portfolio after a significant amount of loans have renegotiated their interest rates from floating to fixed rates.
-- No limits in the transaction documentation to further renegotiations.
-- Portfolio performance in terms of delinquencies and defaults, as of the January 2017 payment date.
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions for the remaining portfolio collateral.
-- The current available credit enhancement (CE) to the Class A Notes to cover ELs at the A (sf) rating level.

IM Sabadell RMBS 2 FTA is a residential mortgage-backed securities transaction originated and serviced by Banco de Sabadell, S.A. (Banco Sabadell or the Servicer) and closed in June 2008. DBRS assigned a rating to the Class A Notes in March 2011.

INTEREST RATE RISK
Over the last few months, the Servicer has renegotiated a significant amount of interest rates to fix from floating rates. The fixed interest-rate loan portion amounts increased to 25.03% of the performing portfolio collateral balance as of January 2017 from 2.23% and 1.33% as of closing and January 2016, respectively. That represents an increased interest rate risk caused by a mismatch between the interest rates in the assets and liabilities as the transaction is unhedged since 22 February 2016 when the interest rate swap agreement was terminated.

Although the renegotiations seem to be the result of two specific campaigns undertaken by Banco Sabadell (since they have ended, they should already result in a more stable portfolio), given the lack of limits to further renegotiations under the transaction documentation, there is no guarantee that the percentage of loans paying a fixed interest rate will not continue to increase. The UR-Neg. status of the Notes reflects the potential negative effect on the rating that further interest rate renegotiations (i.e., to fixed rate from floating rate) might have. DBRS will monitor the interest rate type renegotiations over the next few months, along with potential remedial mitigants implemented by the servicer, if any, and will resolve the UR-Neg. status accordingly.

PORTFOLIO PERFORMANCE
As of January 2017, the loans’ 90+ days delinquent percentage is at 0.21% of the outstanding performing portfolio collateral balance. Defaults are defined as loans in arrears for more than 12 months; the current cumulative defaults are at 1.99% of the initial portfolio collateral balance.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the remaining pool and updated its PD and LGD assumptions on the remaining portfolio collateral pool to 13.80% and 25.72%, respectively.

CREDIT ENHANCEMENT
The Class A Notes are supported by two classes of subordinated notes (Class B and C Notes) and a Reserve Fund (RF). As of the January 2017 payment date, CE for the Class A Notes as a percentage of the non-defaulted mortgage loans has been stable at 9.00% since DBRS’s last annual review. All three classes of Notes in the transactions are currently amortising pro rata.

The transaction also benefits from an amortising RF, which is currently at the target level (EUR 20.425 million), 4% of total outstanding balance of the Notes. The RF covers both interest and principal payment shortfall on all three classes of Notes.

Banco Santander S.A. (Santander) acts as Account Bank for this transaction. Santander’s current long- term Critical Obligations Rating (A (high)/R-1 (middle)) complies with the Minimum Institution Rating, given the rating assigned to the Class A Notes as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is “Master European Structured Finance Surveillance Methodology.”

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

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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 DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of data and information used for this rating include investor report from InterMoney Titulización S.G.F.T., S.A and loan-level data from the European DataWarehouse GmbH.

DBRS did 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 this rating to be of satisfactory quality.

DBRS 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 2 June 2016, when DBRS confirmed the Class A Notes at AA (sf).

The lead analyst responsibilities for this transaction have been transferred to Antonio Di Marco.

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 rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- DBRS 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 assumptions for the remaining portfolio collateral are 3.23% and 12.31%, respectively. At the A (sf) rating level, the corresponding PD is 13.80% and the LGD is 25.72%.

-- 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 LGD increases by 50%, the rating on the Class A Notes would be expected to be at BBB (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A Notes would be expected to be at BBB (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and the LGD increase by 50%, the rating on the Class A Notes would be expected to be at BBB (sf).

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (sf)

This rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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 regulations only.

Lead Analyst: Antonio Di Marco, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 2 March 2011

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY
United Kingdom
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.

-- Master European Structured Finance Surveillance Methodology
-- European RMBS Insight: Spanish Addendum
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model for European Securitisations

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.