Morningstar DBRS Confirms Credit Rating on Secucor Finance 2021-1 DAC

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AA (sf) credit rating on the Class A Notes issued by Secucor Finance 2021-1 DAC (the Issuer).

The credit rating addresses the timely payment of interest and the ultimate payment of principal by the final maturity date in July 2032.

CREDIT RATING RATIONALE
The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the February 2024 payment date;
-- Updated probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AA (sf) credit rating level; and
-- No amortisation events or breach of concentration limits occurred to date.

The transaction is a revolving securitisation of amortising consumer loans, store card-charge loans, and revolving credit facilities granted to customers of El Corte Inglés S.A. group in Spain. The portfolio is serviced by the captive finance company of the group, Financiera El Corte Inglés E.F.C., S.A. (Financiera El Corte Inglés).

The transaction is structured with a 36-month revolving period scheduled to end in July 2024, and features borrowing base calculations and dynamic credit enhancement from the Class B Variable Funding Notes (VFN). Additionally, various reserves and excess spread provide support to the Class A Notes. There is a yield reserve for interest-free loans to cover the servicing fees and interest on the Class A Notes, and a dilution reserve floored at 3% to cover merchandise disputes, rebates, and frauds. Additionally, there is a loss reserve based on the weighted-average (WA) loss reserve factor of each loan type that determines, together with the dilution reserve, the asset factor. The asset factor is used to derive the maximum Class A advance. As the asset factor has a floor of 9%, the Class A Notes will have at least 8.3% subordination support from the Class B VFN minimum amount.

PORTFOLIO PERFORMANCE
As of the 31 January 2024 portfolio cut-off date, delinquencies were low, with 90+-day arrears representing 0.8% of the outstanding portfolio balance, up from 0.5% as at 31 January 2023. The gross cumulative default ratio stood at 0.37% of the initial portfolio, up from 0.25% at the last annual review.

The following triggers are within the limits:
-- Minimum borrowing base trigger,
-- Principal retention trigger,
-- Class A reserve fund trigger,
-- Delinquency trigger,
-- Default trigger,
-- WA maturity triggers for the various products and on an aggregate portfolio basis, and
-- Dilution trigger.

The yield reserve, dilution reserve, and loss reserve were 0.4%, 3.0%, and 16.0%, respectively, resulting in an asset factor of 23.5%. This brings the minimum subordination to 19.0%, well below the current subordination of 41.1% from which the Class A Notes benefit.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the outstanding pool of receivables and maintained its base-case PD and LGD assumptions at 4.4% and 85.0%, respectively. Morningstar DBRS continues to base its analysis on worst-case portfolios constructed to address potential migration towards the riskiest products during the revolving period.

CREDIT ENHANCEMENT
The Class A Notes benefit from subordination provided by the dynamically funded Class B VFN. The subordination is above the minimum level and has increased to 41.1% from 38.2% at the last annual review.

The transaction benefits from a reserve that is available to cover shortfalls in senior expenses and interest on the Class A Notes. The reserve required amount is 0.75% of the outstanding Class A Notes balance with a floor of 0.07% of the Class A Notes’ balance at the start of the amortisation period. As of the February 2024 payment date, the cash reserve was at its target of EUR 5.6 million.

Banco Santander SA acts as the account bank for the transaction. Based on Morningstar DBRS’ Long-Term Issuer Rating of A (high) on Banco Santander SA (one notch below its Long Term Critical Obligations Rating of AA (low)), the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structures, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit rating assigned to the Class A Notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS’ credit rating on the Class A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: “Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS 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 continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include monthly reports provided by Financiera El Corte Inglés.

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

At the time of the initial credit rating, Morningstar DBRS was supplied with third-party assessments. However, this did not affect the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 15 March 2023, when Morningstar DBRS confirmed its AA (sf) credit rating on the Class A Notes.

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- Morningstar DBRS expected a lifetime base-case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base-case assumptions and therefore have a negative effect on the credit rating.
-- The base-case PD and LGD of the current pool of loans for the Issuer are 4.4% and 85.0%, respectively.

Class A Notes Risk Sensitivity:
-- 100% LGD, expected credit rating of AA (sf)
-- 25% increase in PD, expected credit rating of AA (sf)
-- 50% increase in PD, expected credit rating of A (sf)
-- 25% increase in PD and 100% LGD, expected credit rating of A (high) (sf)
-- 50% increase in PD and 100% LGD, expected credit rating of A (sf)

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pascale Kallas, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Credit Rating Date: 15 July 2021

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

-- Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024), https://dbrs.morningstar.com/research/429054
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219
-- Rating European Structured Finance Transactions Methodology (11 December 2023), https://dbrs.morningstar.com/research/425149
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

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

For more information on this credit or on this industry, visit https://dbrs.morningstar.com/ or contact us at info-DBRS@morningstar.com.