DBRS Morningstar Finalises Provisional Ratings on IM Andbank RMBS 1, Fondo de Titulización

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by IM Andbank RMBS 1, Fondo de Titulización (Andbank RMBS 1 or the Issuer):

-- Class A Notes at AA (high) (sf)
-- Class B Notes at A (high) (sf)
-- Class C Notes at BB (high) (sf)

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the final maturity date. The ratings on the Class B and Class C Notes (together with the Class A Notes, the Rated Notes) address the ultimate payment of interest and the ultimate repayment of principal on or before the final maturity dates. DBRS Morningstar does not rate the Class Z Notes (together with the Rated Notes, the Notes) that are also issued in this transaction.

Andbank RMBS 1 issued three rated tranches of collateralised mortgage-backed securities—Class A, Class B, and Class C—to finance the purchase of a portfolio of first-lien residential mortgage loans originated by Andbank España, S.A.U. (Andbank). The mortgage loans are secured over residential properties in Spain. Additionally, Andbank RMBS 1 issued one class of uncollateralised notes, the Class Z Notes, which will be used to fund the reserve fund amount from the closing date. Andbank originated and services the mortgage loans. Intermoney Titulización S.G.F.T., S.A. (Intermoney or the Management Company) manages the transaction.

The transaction has a one-year revolving period, during which the Issuer may acquire further mortgage loans if certain conditions are met. DBRS Morningstar analysed the portfolio assessing the portfolio characteristics in line with the portfolio concentration limits in accordance with the eligibility criteria. To purchase additional mortgage loans, the Issuer will use its available funds and will also be entitled to increase the outstanding balance of the Notes during the first 12 months. The outstanding balance of the Rated Notes will not exceed EUR 300 million and the outstanding balance of the Notes will not exceed EUR 313.5 million. The Issuer will be able to issue additional Rated Notes as long as the rating on each of the notes is not downgraded. After the end of the revolving period or if there is a revolving period early termination event, the Notes will start amortising.

Credit enhancement for the Class A Notes is calculated at 12.0% and is provided by the subordination of the Class B, Class C, and Class Z Notes. Credit enhancement for the Class B Notes is calculated at 8.0% and is provided by the subordination of the Class C and Class Z Notes. Credit enhancement for the Class C Notes is calculated at 4.5% and is provided by the Class Z Notes.

The reserve fund will be established and fully funded at closing with the proceeds from the issuance of the Class Z Notes, providing liquidity and credit support to the Rated Notes in the priority of payments. The initial balance will be EUR 6.75 million, equal to 4.5% of the initial balance of the Rated Notes at closing. The target amount will be lower of (1) 4.5% of the initial balance of the Notes and (2) 9.0% of the outstanding balance of the Notes with a floor of 2.25% of the initial balance of the Notes. The reserve fund will not amortise during the first year of the revolving period or if the reserve fund is not at its target.

The Rated Notes will repay principal on a pro rata basis; however, if there is a Class C subordination event, then the Class A and B Notes will continue to amortise on a prorated basis, whereas principal on the Class C Notes will not be paid until the Class A and B Notes have been redeemed in full. If there is a Class B subordination event, then the repayment of the Rated Notes will switch to sequential amortisation, where principal on the Class B Notes will not be paid until the Class A Notes have been redeemed in full and principal on the Class C Notes will not be paid until the Class B Notes have been redeemed in full. The subordination events on the Class B and Class C Notes include both reversible triggers and nonreversible triggers. The reversible triggers are linked to the default rates on the mortgage loans observed over the past 12 months and to certain amortisation deficiency conditions. The nonreversible triggers are also linked to amortisation deficiency conditions as well as the default rates observed at one point in time. Principal amortisation includes a provision mechanism through the use of excess spread in the priority of payments for defaulted loans (i.e., loans more than or equal to 12 months in arrears).

DBRS Morningstar was provided with a provisional portfolio equal to EUR 161.0 million as of 14 December 2021 (the cut-off date), which consisted of 977 loans extended to 952 borrowers. The weighted-average (WA) original loan-to-value (LTV) ratio stands at 56.9% whereas the WA current indexed LTV is 50.2%. The mortgage loan portfolio is distributed among the Spanish regions of Madrid (47.2% by current balance), Catalonia (25.6%), and Andalusia (8.0%). The mortgage loans in the asset portfolio are owner occupied (80.1%), with 17.3% classified as second homes and 2.6% classified as buy to let. All the loans in the pool pay on a repayment basis. There are almost no loans granted to self-employed borrowers in the pool. As of the cut-off date, none of the mortgage loans were in arrears. The WA coupon of the mortgages is 0.73% and the WA seasoning of the portfolio is low at 17.7 months, as the majority of the loans were originated about two years ago.

Of the portfolio balance, 38.3% are mortgages that allow for margin or interest rate reduction due to cross-selling of other Andbank products. The portfolio consists of floating-rate loans with a one-year fixed-rate period from origination indexed to 12-month Euribor. About two-thirds of the loans (68.8% of the portfolio balance) have already switched to floating rate with a WA margin of 0.85% whereas the remaining 31.2% are still in the fixed-rate period for about 3.4 months on a WA basis. After the application of the margin reductions, the WA interest rate of the loans will reduce to 0.81%. DBRS Morningstar assumed the margin of the portfolio to be the minimum allowed per the loan agreement. In addition, the servicer can grant loan modifications without the Management Company’s consent, including (1) maturity extensions, (2) 12-month grace periods for 2% of the portfolio, and (3) margin or interest rate reductions. These loan modifications are limited to 7.5% of the portfolio. DBRS Morningstar also factored this into its analysis.

The Notes are floating rate and linked to one-month Euribor whereas the mortgage loans are linked to 12-month Euribor. The basis risk mismatch will be unhedged; however, DBRS Morningstar also factored this into its analysis.

The transaction’s account bank agreement and replacement trigger require Banco Santander SA (Banco Santander), acting as the treasury account bank, to find (1) a replacement account bank or (2) an account bank guarantor upon loss of an applicable “A” account bank rating. DBRS Morningstar’s Long Term Critical Obligations Rating (COR), Long-Term Issuer Rating and Senior Debt rating, and Long-Term Deposits rating on Banco Santander are AA (low), A (high), and A (high), respectively, as of the date of this press release. The applicable account bank rating is the higher of one notch below the COR, Long-Term Senior Debt rating, and Long-Term Deposits rating on Banco Santander.

DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the portfolio and DBRS Morningstar’s qualitative assessment of Andbank’s capabilities with regard to originations, underwriting, and servicing.
-- DBRS Morningstar was provided with a loan-level data for the mortgage portfolio. DBRS Morningstar calculated probability of default (PD), loss given default (LGD), and expected loss levels on the mortgage portfolio, which DBRS Morningstar used as inputs in the cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “European RMBS Insight Methodology” and “European RMBS Insight: Spanish Addendum”.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the noteholders according to the terms and conditions in the transaction documents. DBRS Morningstar analysed the transaction structure using Intex DealMaker. DBRS Morningstar considered additional sensitivity scenarios of 0% conditional repayment rate stress.
-- The transaction parties’ financial strength to fulfil their respective roles.
-- The transaction’s legal structure and its expected consistency with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology as well as the presence of the appropriate legal opinions that address the assignment of the assets to the Issuer.
-- DBRS Morningstar’s sovereign rating on the Kingdom of Spain of “A” with a Stable trend as of the date of this press release.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many RMBS 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 this transaction, DBRS Morningstar incorporated an increase in default probability of self-employed borrowers in its analysis and conducted additional analysis to determine the transaction benefits from sufficient liquidity support in case of high level of payment moratoriums in the portfolio. In addition, DBRS Morningstar assumed a moderate decline in residential property prices.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 9 December 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/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated RMBS transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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 are the “European RMBS Insight Methodology” (3 June 2021) and the “European RMBS Insight: Spanish Addendum” (6 July 2021).

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.

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. Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 Andbank and Intermoney. DBRS Morningstar was provided with loan-level data as of 14 December 2021. Intermoney confirmed that there were no historical defaults for similar mortgages on Andbank’s balance sheet.

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

DBRS Morningstar was not 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.

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

This is the first rating action since the Initial Rating Date (11 January 2022). DBRS Morningstar had previously assigned provisional ratings on 18 June 2021, which were subsequently discontinued and withdrawn on 25 October 2021.

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

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- In respect of the Class A Notes, the PD of 18.1% and LGD of 27.1%, corresponding to a AA (high) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class B Notes, the PD of 14.0% and LGD of 21.5%, corresponding to a A (high) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class C Notes, the PD of 6.4% and LGD of 8.9%, corresponding to a BB (high) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating A (sf)

Class B 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)
-- 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, 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 BBB (high) (sf)

Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (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. 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: Ronja Dahmen, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 11 January 2022

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

-- European RMBS Insight Methodology (3 June 2021) and European RMBS Insight Model (v.5.4.1.0.), https://www.dbrsmorningstar.com/research/379557/european-rmbs-insight-methodology.
-- European RMBS Insight: Spanish Addendum (6 July 2021),
https://www.dbrsmorningstar.com/research/366107/european-rmbs-insight-spanish-addendum.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021), https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.

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