Press Release

DBRS Morningstar Upgrades and Confirms Ratings on Two CaixaBank PYMES Transactions

Structured Credit

November 18, 2021

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by two CaixaBank PYMES transactions:

CaixaBank PYMES 9, FT (CX9)
-- Series A Notes upgraded to AA (high) (sf) from AA (sf)
-- Series B Notes confirmed at CCC (high) (sf)

CaixaBank PYMES 10, FT (CX10)
-- Series A notes confirmed at AA (high) (sf)
-- Series B notes confirmed at CCC (sf)

The ratings of the Series A notes address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date of each transaction (March 2053 for CX9 and October 2051 for CX10).

The ratings of the Series B notes address the ultimate payment of interest and the ultimate payment of principal on or before the legal final maturity date of each transaction.

The rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the September 2021 and October 2021 payment dates for CX9 and CX10, respectively.
-- 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 at their respective rating levels.
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

CX9 and CX10 are securitisations of secured and unsecured loans and drawdowns of secured and unsecured lines of credit originated by CaixaBank, S.A. (CaixaBank) to small and medium-size enterprises (SMEs) and self-employed individuals based in Spain.

PORTFOLIO PERFORMANCE
CX9: As of the 20 September 2021 payment date, loans more than three months delinquent represented 1.7% of the portfolio balance, unchanged from the last annual review. Gross cumulative defaults amounted to 2.2% of the original collateral balance, up from 1.7% one year ago.

CX10: As of the 25 October 2021 payment date, loans more than three months delinquent represented 2.1% of the portfolio balance, up from 1.7% at the last annual review. Gross cumulative defaults amounted to 1.3% of the original collateral balance, up from 0.8% one year ago.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool of each transaction. For CX9, DBRS Morningstar updated the portfolio’s one-year base case PD assumption to 2.8%, including coronavirus-related adjustments. In addition, DBRS Morningstar updated the weighted-average recovery rate on the portfolio to 31.5% at the AA (high) (sf) rating level and to 40.1% at the CCC (high) (sf) rating level.

For CX10, DBRS Morningstar updated the portfolio’s one-year base case PD assumption to 3.6%, also including coronavirus-related adjustments. In addition, DBRS Morningstar updated the weighted-average recovery rate on the portfolio to 37.2% at the AA (high) (sf) rating level and to 46.0% at the CCC (sf) rating level.

CREDIT ENHANCEMENT
Credit enhancement in both transactions is provided by the subordination of the Series B notes and the reserve fund. The reserve fund is available to cover missed interest and principal payments on the Series A notes and Series B notes once the Series A notes have been paid in full. The reserve funds amortise in line with their target amortisation amounts (4.0% of the outstanding balance of the notes) and are currently slightly above their target levels at EUR 22.4 million for CX9 and EUR 55.9 million for CX10.

CX9: As of the September 2021 payment date, the credit enhancement to the Series A Notes was 48.6%, up from 33.2% at the last annual review, which prompted rating upgrade; the credit enhancement to the Series B Notes was 4.4%, up from 4.3% one year ago.

CX10: As of the October 2021 payment date, the credit enhancement to the Series A notes was 45.8%, up from 33.4% at the last annual review; the credit enhancement to the Series B notes was 4.3%, unchanged from one year ago.

CaixaBank acts as the account bank for both transactions. Based on the account bank reference rating of CaixaBank at A (high), which is one notch below the DBRS Morningstar Long Term Critical Obligations Rating (COR) of AA (low), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Series A notes in each transaction, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

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

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many SME transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For these transactions, 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 per DBRS Morningstar’s assessment, 6.1% and 34.6% of the outstanding portfolio balance for CX9 and 6.8% and 37.9% for CX10 represented industries classified in the mid-high and high-risk economic sectors, respectively. This led the underlying one-year PDs to be multiplied by 1.5 times (x) and 2.0x, respectively, as per DBRS Morningstar’s “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary released on 18 May 2020, wherein 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 more 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.

DBRS Morningstar also conducted an additional sensitivity analysis to determine that the transactions benefit from sufficient liquidity support to withstand high levels of payment holidays in the portfolios. As of 31 August 2021, around 4.1% of the performing balance benefited from principal grace periods for CX9. As of 30 September 2021, around 9.9% of the performing balance benefitted from principal grace periods for CX10.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

ESG CONSIDERATIONS
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/373262.

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” (28 June 2021).

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions 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.

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/381451/global-methodology-for-rating-sovereign-governments.

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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include investor reports provided by the Management Company, CaixaBank Titulización, S.G.F.T., S.A.U., and loan-level data provided by 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 ratings of both transactions, 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 both transactions took place on 6 April 2021, when:
-- For CX9, DBRS Morningstar upgraded the rating of the Series A Notes to AA (sf) from A (high) (sf).
-- For CX10, DBRS Morningstar upgraded the rating of the Series A Notes to AA (high) (sf) from AA (sf).

The lead analyst responsibilities for these transactions have been transferred to Helvia Meana.

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 2.8% and 3.6% for CX9 and CX10, respectively, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: CX9: Base case recovery rates of 31.5% at the AA (high) (sf) stress level for the Series A Notes and of 40.1% at the CCC (high) (sf) for the Series B Notes, a 10% and 20% decrease in the base case recovery rates, respectively; CX10: Base case recovery rates of 37.2% at the AA (high) (sf) stress level for the Series A notes and of 46.0% at the CCC (sf) rating level for the Series B notes, a 10% and 20% decrease in the base case recovery rates, respectively. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery-rate levels.

CX9: DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Series A Notes at AA (high) (sf) and a downgrade of the Series B Notes to below CCC (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%, ceteris paribus, would also lead to a confirmation of the Series A Notes at AA (high) (sf) and a downgrade of the Series B Notes to below CCC (low) (sf).

CX10: DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Series A notes at AA (high) (sf) and a downgrade of the Series B notes to below CCC (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%, ceteris paribus, would also lead to a confirmation of the Series A notes at AA (high) (sf) and a downgrade of the Series B notes to below CCC (low) (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.
DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Helvia Meana, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: CX9: 21 November 2017; CX10: 20 November 2018

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:
https://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.

Download This Press Release