DBRS Ratings GmbH (DBRS Morningstar) upgraded its ratings on the notes issued by Tagus - Sociedade de Titularização de Créditos, S.A. (Aqua Finance No. 4) (the Issuer) as follows:
-- Class A Notes to AA (sf) from A (sf)
-- Class B Notes to A (high) (sf) from BBB (high) (sf)
The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in June 2035. The rating on the Class B Notes addresses the ultimate payment of interest and principal on or before the legal final maturity date in June 2035.
The upgrades follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the May 2020 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels;
-- Current economic environment and sustainable performance assessment, as a result of the Coronavirus Disease (COVID-19) outbreak.
The Issuer is a Portuguese securitisation of loans, leases, and rental agreements of automobiles, commercial trucks, and miscellaneous equipment granted to private individuals and companies, originated and serviced by Montepio Crédito - Instituição Financeira de Crédito (Montepio Crédito). The transaction closed in July 2017, and incorporated an 18-month revolving period, which ended in January 2019.
Additionally, promissory agreements relating to certain auto and commercial truck leases and rental agreements are included in the pool. Under these agreements, the vehicle supplier undertakes to repurchase the related asset at the contract term if not purchased by the obligor, at a price agreed between Montepio Crédito and the supplier at origination. If the relevant supplier defaults, the originator may have to sell or re-lease the assets at a price lower than that agreed in the promissory agreement, exposing the transaction to residual value (RV) risk.
As of May 2020, one-to-two and two-to-three months delinquencies represented 1.1% and 0.7% of the outstanding collateral balance, respectively, while three-to-six months delinquencies were 0.7%. Gross cumulative defaults amounted to 1.2% of the aggregate original portfolio balance, with cumulative recoveries of 39.8% to date.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 9.1% and 87.8%, respectively.
The subordination of the respective junior obligations and the cash reserve provide credit enhancement to the notes. As of the May 2020 payment date, credit enhancement to the Class A Notes increased to 62.1% from 40.2% at the time of the last annual review; credit enhancement to the Class B Notes increased to 47.1% from 30.2%. The increased credit enhancement prompted the upgrades of the rated notes.
The transaction benefits from a nonamortising cash reserve, funded to EUR 7.0 million at closing through the proceeds of the Class C Notes issuance, which is available to cover senior expenses and interest shortfalls on the Class A Notes. Following the full repayment of the Class A Notes, the reserve will be available to cover interest shortfalls on the Class B Notes. The cash reserve also provides credit support to the Class A Notes as its replenishment is subordinated to the cure of the Class A Principal Deficiency Ledger balance in the interest priority of payments. As of the May 2020 payment date, the reserve was at its target balance of EUR 7.0 million.
Deutsche Bank AG, London Branch (DB London) acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of DB London, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank 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 Intex DealMaker.
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 delinquencies may arise in the coming months for many ABS 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.
The DBRS Morningstar Sovereign group released on 16 April 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were updated on 1 June 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/361868/dbrs-morningstar-global-macroeconomic-scenarios-june-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.
For more information on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/360734.
Given the large share of commercial obligors in the transaction, results from the DBRS Morningstar SME Diversity Model were incorporated into the analysis. For more information on DBRS Morningstar considerations for European SME transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/361098.
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.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with 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 Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for these ratings include investor reports and information provided by DB London (the Transaction Manager), and loan-level data provided by Montepio Crédito.
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 this transaction took place on 9 July 2019, when DBRS Morningstar upgraded its ratings on the Class A and Class B Notes to A (sf) and BBB (high) (sf), respectively, from A (low) (sf) and BBB (low) (sf), respectively.
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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):
-- DBRS Morningstar 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 credit ratings.
-- The base case PD and LGD of the current pool of loans for the Issuer are 9.1% and 87.8%, respectively.
-- RV Loss of 43.8% and 39.3% at the AA (sf) and A (high) (sf) rating levels, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD, LGD, RV Loss increase by a certain percentage over the base case assumption. For example, if the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to decrease to AA (low) (sf), ceteris paribus. If the RV Loss increases by 50%, the rating of the Class A Notes would be expected to remain at AA (sf), ceteris paribus. Furthermore, if the PD, LGD and RV Loss all increase by 50%, the rating of the Class A Notes would be expected to decrease to AA (low) (sf).
Class A Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of AA (sf)
-- 50% increase in PD and LGD, expected rating of AA (low) (sf)
-- 25% increase in RV Loss, expected rating of AA (sf)
-- 50% increase in RV Loss, expected rating of AA (sf)
-- 25% increase in RV Loss and 25% increase in PD and LGD, expected rating of AA (sf)
-- 25% increase in RV Loss and 50% increase in PD and LGD, expected rating of AA (low) (sf)
-- 50% increase in RV Loss and 25% increase in PD and LGD, expected rating of AA (sf)
-- 50% increase in RV Loss and 50% increase in PD and LGD, expected rating of AA (low) (sf)
Class B Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of A (sf)
-- 50% increase in PD and LGD, expected rating of A (low) (sf)
-- 25% increase in RV Loss, expected rating of A (high) (sf)
-- 50% increase in RV Loss, expected rating of A (high) (sf)
-- 25% increase in RV Loss and 25% increase in PD and LGD, expected rating of A (sf)
-- 25% increase in RV Loss and 50% increase in PD and LGD, expected rating of A (low) (sf)
-- 50% increase in RV Loss and 25% increase in PD and LGD, expected rating of A (sf)
-- 50% increase in RV Loss and 50% increase in PD and LGD, expected rating of BBB (high) (sf)
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Daniel Rakhamimov, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 21 June 2017
DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.
-- Master European Structured Finance Surveillance Methodology (22 April 2020),
-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020), https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (28 February 2020),
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
-- Rating CLOs Backed by Loans to European SMEs (8 July 2019) and DBRS Diversity Model v188.8.131.52,
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
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 email@example.com.