Press Release

DBRS Morningstar Takes Rating Actions on IM Sabadell PYME 11, FT

Structured Credit

December 18, 2020

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on IM Sabadell PYME 11, FT (the Issuer):

-- Series A Notes confirmed at A (high) (sf)
-- Series B Notes upgraded to B (high) (sf) from CCC (high) (sf)

The rating of the Series A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in June 2057. The rating of the Series B Notes addresses the ultimate payment of interest and principal on or before the legal final maturity date.

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:

-- The portfolio performance, in terms of level of delinquencies and defaults, as of the September 2020 payment date.
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables.
-- The current available credit enhancement to the rated notes to cover the expected losses assumed in line with their respective rating levels.
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The Issuer is a cash flow securitisation collateralised by a portfolio of bank loans originated and serviced by Banco de Sabadell, S.A. (Sabadell), to self-employed individuals and small and medium-size enterprises (SMEs) based in Spain.

PORTFOLIO PERFORMANCE
The portfolio is performing within DBRS Morningstar’s expectations. As of September 2020, the 90+ delinquency ratio was at 0.7% and the cumulative default ratio was at 2.9%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated the portfolio’s one-year base case PD assumption to 3.7%, following coronavirus-related adjustments. DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool and updated its PD and recovery assumptions to 33.9% and 31.6%, respectively, at the A (high) (sf) rating level. and to 19.6% and 39.7%, respectively, at the B (high) (sf) rating level.

The increased base case PD assumption compared with one year ago at the time of the last annual review reflects the adjustments applied because of the coronavirus pandemic. As per DBRS Morningstar’s assessment, 3.6% and 34.0% of the outstanding portfolio balance represented industries classified in mid-high and high risk economic sectors, respectively, which led to the underlying one-year PDs to be multiplied by 1.5 and 2.0 times, respectively, as per DBRS Morningstar “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary, released on 8 May 2020, where DBRS Morningstar discussed the overall risk exposure of the SME sector to the coronavirus and provided a framework for identifying the transactions that are more at risk and likely to be affected by the fallout of the pandemic on the economy. For more details, please see: https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

CREDIT ENHANCEMENT
The credit enhancement available to the rated notes continues to increase as the transaction deleverages. As of the September 2020 payment date, the credit enhancement available to the Series A Notes and Series B Notes was 73.0% and 15.6%, respectively, up from 46.8% and 10.2% one year ago.

Sabadell acts as the account bank for the transaction. Based on the reference rating of Sabadell at “A”, one notch below DBRS Morningstar’s Long-Term Critical Obligations Rating of A (high), the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS Morningstar considers the risk arising from the exposure to Sabadell to be consistent with the ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that payment holidays and delinquencies may continue to increase in the coming months for many SME transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar increased the expected default rate on receivables granted to obligors operating in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus as mentioned, and conducted additional sensitivity analysis to determine that the transactions benefit from sufficient liquidity support to withstand high levels of payment holidays in the portfolio. As of October 2020 , only 0.02% of the collateral balance had been granted payment moratoriums.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 2 December 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Rating CLOs Backed by Loans to European SMEs” (30 September 2020).

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 rating action.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include servicer and investor reports provided by the Management Company, InterMoney Titulización S.G.F.T., S.A. and a loan-level data from the European DataWarehouse GmbH.

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 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 last rating action on the transaction took place on 19 December 2019, when DBRS Morningstar confirmed the rating of the Series A Notes at A (high) (sf) and upgraded the rating of the Series B Notes to CCC (high) (sf) from CCC (low) (sf).

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at www.dbrsmorningstar.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 (the base case):
-- PD Rates Used: Base case PD of 3.7%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rates of 31.6% at the A (high) (sf) rating level, and 39.7% at the B (high) (sf) rating level for the Series A Notes and Series B Notes, respectively, and a 10% and 20% decrease in the base case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery-rate levels.

DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Series A Notes at A (high) (sf) and a hypothetical decrease of the recovery rate by 20, ceteris paribus, would lead to a confirmation of the Series A Notes at A (high) (sf). A scenario combining both a hypothetical increase in the PD by 10% and a hypothetical decrease in the recovery rate by 10%, would also lead to a confirmation of the Series A Notes at A (high) (sf).

For the Series B Notes, DBRS Morningstar concluded that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a downgrade of the Series B Notes to B (sf), and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade of the Series B Notes to B (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%, ceteris paribus, would also lead to a downgrade of the Series B Notes to B (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.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Alfonso Candelas, Senior Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 15 December 2017

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main – Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

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 info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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