Press Release

DBRS Morningstar Finalises Provisional Ratings on Pepper Iberia Unsecured 2022 DAC

Consumer Loans & Credit Cards

May 10, 2022

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by Pepper Iberia Unsecured 2022 DAC (the Issuer):

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

DBRS Morningstar did not assign a rating to the Class J Notes also issued in this transaction.

The ratings of the Class A Notes and the Class B Notes address the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date. The ratings of the Class C Notes, Class D Notes, and Class E Notes address the ultimate repayment of interest (timely when most senior) and the ultimate repayment of principal by the legal final maturity date.

The transaction is a securitisation of fixed-rate, unsecured, amortising consumer loans granted to individuals domiciled in Spain by Pepper Finance Corporation S.L.U. (the originator).

The ratings are based on the following analytical considerations:
-- The transaction's capital structure, including form and sufficiency of available credit enhancement;
-- Credit enhancement levels sufficient to support DBRS Morningstar's projected cumulative net loss assumptions under various stressed scenarios;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the notes;
-- DBRS Morningstar’s operational risk review of the originator’s capabilities with regard to originations, underwriting, and servicing;
-- The transaction parties’ financial strength regarding their respective roles;
-- The credit quality, diversification of the collateral, and historical and projected performance of the originator’s portfolio;
-- DBRS Morningstar's sovereign rating on the Kingdom of Spain, currently at “A” with a Stable trend; and
-- The consistency of the transaction's legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE
The transaction has a scheduled 24-month revolving period. During the revolving period, the originator may offer additional receivables that the Issuer will purchase, provided that the eligibility criteria and concentration limits set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur, such as the breach of performance triggers, insolvency of the originator, or replacement of the servicer.

The transaction allocates collections in separate interest and principal priorities of payments and benefits from an amortising reserve of EUR 3,638,250 at closing. The cash reserve would be replenished in the transaction interest waterfalls and amortise to the target amount of 1.75% of the Class A, Class B, Class C, and Class D Notes during the redemption period without a floor. The reserve was initially funded with the proceeds of the Class J Notes and can be used to cover senior expenses and interest payments of the most senior class among the Class A, Class B, Class C, and Class D Notes. The remaining cash reserve at the full repayment of the Class D Notes would become part of principal available funds.

The transaction also benefits from a principal deficiency ledger mechanism to capture excess spread to cure principal deficiencies. Principal funds can also be reallocated to cover senior expenses and interest payments on the most senior class of the rated notes (including the Class E Notes) if the interest collections and reserve are not sufficient.

At the end of the revolving period, the notes will be repaid on a fully sequential basis.

The interest rate risk is expected to be largely mitigated by an interest rate cap arrangement provided by J.P. Morgan SE.

COUNTERPARTIES
Citibank Europe plc is the account bank for the transaction. DBRS Morningstar has a Long-Term Issuer Rating of AA (low) on Citibank Europe. The transaction documents contain downgrade provisions relating to the account bank consistent with DBRS Morningstar’s criteria.

J.P. Morgan SE is the cap counterparty for the transaction. DBRS Morningstar has a private rating on J.P. Morgan SE, which meets its criteria to act in such capacity. DBRS Morningstar notes that the downgrade provisions in the transaction documents are not fully consistent with its criteria and it will monitor the transaction based on its rating of J.P. Morgan SE or its replacement.

DBRS Morningstar analysed the transaction structure in Intex Dealmaker.

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 European Consumer and Commercial Asset-Backed Securitisations” (29 October 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://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 the 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” methodology 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 the following data provided by the originator or through the arranger, Citigroup Global Markets:

Personal loans:
-- Monthly dynamic defaults from July 2015 to September 2021;
-- Monthly static cumulative default data from July 2015 to June 2021;
-- Quarterly static cumulative default data from Q3 2015 to Q3 2021;
-- Monthly static cumulative recovery data from November 2015 to September 2021;
-- Quarterly static cumulative recovery data from Q4 2015 to Q4 2021;
-- Monthly dynamic delinquencies from July 2015 to February 2022;
-- Quarterly dynamic prepayments from Q2 2015 to Q3 2021;
-- Stratification tables and loan-by-loan data as of 30 April 2022.

Point-of-sale loans:
-- Monthly dynamic defaults from January 2015 to September 2021;
-- Monthly static cumulative default data from January 2015 to September 2021;
-- Quarterly static cumulative default data from Q1 2015 to Q3 2021;
-- Monthly and quarterly static cumulative recovery data from January 2015 to September 2021;
-- Quarterly static cumulative recovery data from Q2 2015 to Q4 2021;
-- Monthly dynamic delinquencies from January 2015 to February 2022;
-- Quarterly dynamic prepayments from Q1 2015 to Q3 2021;
-- Stratification tables and loan-by-loan data as of 30 April 2022.

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.

These ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments since the Initial Rating Date.

This is the first rating action on this transaction since the Initial Rating Date.

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 ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings:

-- Expected Default Rate of 4.6%: A 25% and 50% increase.
-- Expected loss given default (LGD) of 83%: A 25% increase.

Scenario 1: 25% increase in Default Rate
Scenario 2: 50% increase in Default Rate
Scenario 3: 25% increase in LGD
Scenario 4: 25% increase in both Default Rate and LGD
Scenario 5: 50% increase in Default Rate and 25% increase in LGD

DBRS Morningstar concludes that the expected ratings under the five stress scenarios are:
-- Class A Notes: AA (high) (sf), AA (sf), AAA (sf), AA (high) (sf), AA (low) (sf)
-- Class B Notes: AA (low) (sf), A (high) (sf), AA (sf), A (high) (sf), A (sf)
-- Class C Notes: A (low) (sf), BBB (sf), A (sf), BBB (high) (sf), BBB (sf)
-- Class D Notes: BB (high) (sf), BB (high) (sf), BBB (low) (sf), BB (high) (sf), BB (low) (sf)
-- Class E Notes: BB (high) (sf), BB (low) (sf), BB (high) (sf), B (high) (sf), 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. 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: Roberto Perez, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 21 April 2022

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