DBRS Morningstar Finalises Provisional Ratings on Pepper Iberia Unsecured 2019 DAC

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the Class A, Class B, Class C and Class D Notes (together, the Rated Notes) issued by Pepper Iberia Unsecured 2019 DAC (the Issuer), as follows:

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (high) (sf)
-- Class D Notes at BBB (sf)

The Class J Notes are not rated by DBRS.

The rating assigned to the Class A Notes addresses the timely payment of scheduled interest and ultimate repayment of principal by the legal final maturity date. The ratings assigned to the Class B, Class C and Class D Notes address the ultimate payment of scheduled interest while subordinated but the timely payment of scheduled interest and ultimate repayment of principal by the legal final maturity date when the most-senior class.

The assigned rating of BBB (sf) to the Class D Notes is one notch higher than the provisional ratings following updated cashflow analysis, which was positively impacted by the lower than initially expected margins on the Rated Notes.

The ratings are based on the following considerations:
-- The transaction’s capital structure including available credit enhancement in the form of subordination, liquidity support and excess spread.
-- Sufficient credit enhancement levels to support DBRS Morningstar’s expected defaults and recoveries under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Rated Notes.
-- The capabilities of Pepper Finance Corporation, S.L.U. and Pepper Assets Services, S.L.U. with respect to originations, underwriting, servicing and financial strength.
-- The operational risk review of the transferor and servicer, which DBRS Morningstar deems to be an acceptable servicer.
-- The transaction parties’ financial strength regarding their respective roles.
-- The credit quality and concentration of the collateral and historical and projected performance of the seller’s portfolio.
-- The sovereign rating of the Kingdom of Spain, currently rated “A” with a Positive trend by DBRS Morningstar.
-- The consistency of legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the true sale of the assets to the Issuer.

The transaction cash flow structure was analysed in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is “Rating European Consumer and Commercial Asset-Backed Securitisations”.

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

An asset and a cash flow analysis were both conducted.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments methodology at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include performance data relating to the receivables provided by the seller directly or through the arranger, Citigroup Global Markets Limited.

DBRS Morningstar received monthly and quarterly static cumulative default data from July 2015 and January 2015 to June 2019, and Q3 2015 and Q1 2015 to Q2 2019, for personal instalment loans (PIL) and point-of-sale (POS) loans, respectively; monthly and quarterly static cumulative recovery data from November 2015 and April 2015 to June 2019, and Q4 2015 and Q2 2015 to Q2 2019, for PIL and POS loans, respectively; monthly dynamic delinquencies, dynamic defaults and prepayments covering January 2015 to July 2019; a set of stratification tables and loan-by-loan data as at 6 September 2019 along with its related amortisation schedule that allowed DBRS Morningstar to further assess the collateral.

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

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 ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

This is the first rating action since the Initial Rating Date.

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

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

-- Expected default of 5.25%.
-- Expected loss given default (LGD) of 86%.

Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected default and 25% increase in the expected LGD.
Scenario 5: A 50% increase in the expected default and 25% increase in the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and 50% increase in the expected LGD.
Scenario 8: A 50% increase in the expected default and 50% increase in the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:
-- Class A Notes: AA (sf), A (high) (sf), AA (high) (sf), AA (low) (sf), A (high) (sf), AA (high) (sf), AA (low) (sf), A (high) (sf)
-- Class B Notes: AA (low) (sf), A (sf), AA (sf), A (high) (sf), A (sf), AA (sf), A (high) (sf), A (sf)
-- Class C Notes: A (sf), A (low) (sf), A (high) (sf), A (low) (sf), BBB (high) (sf), A (high) (sf), A (low) (sf), BBB (high) (sf)
-- Class D Notes: BB (high) (sf), BB (low) (sf), BBB (low) (sf), BB (sf), B (high) (sf), BBB (low) (sf), BB (sf), B (high) (sf)

For further information on DBRS Morningstar 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 and US regulations only.

Lead Analyst: Jeffrey Cespon, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 September 2019

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

-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions

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

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