DBRS Ratings GmbH (DBRS Morningstar) placed its ratings of the following notes issued by Alhambra SME Funding 2019-1 DAC (the Issuer) Under Review with Negative Implications:
--Class A Notes rated AAA (sf)
--Class B Notes rated AA (sf)
--Class C Notes rated BB (low) (sf)
The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date in November 2028. The ratings on the Class B and Class C Notes address the ultimate payment of interest and principal on or before the final maturity date.
The transaction is a public cash flow securitisation collateralised by a portfolio of loans extended to Spanish small and medium-size enterprises and middle-market corporates. Be-Spoke Capital (Ireland) Limited acts as the origination agent, Be-Spoke Capital (London) Limited is the servicer, and Be-Spoke Capital (Spain) S.L. is the service provider.
KEY RATING DRIVERS AND CONSIDERATIONS
On 18 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated Structured Credit transactions in Europe. 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, where DBRS Morningstar discussed the overall risk exposure of the Structured Credit sector to the coronavirus and provided a framework for identifying the transactions that are more at risk and likely to be affected by the fallout of the pandemic on the economy. DBRS Morningstar identified 19 borrowers that are considered as “Mid-high” or at “High” risk due to the Coronavirus Disease (COVID-19) disruption and adjusted its expected default risk assumption as described in the commentary above.
In February 2020, the transaction benefitted from the loan prepayment of one borrower for the full EUR 10.0 million outstanding principal amount. This prepayment resulted in an amortisation of the Class A Notes by EUR 10.0 million and the excess spread trapping allowed the reserve fund, which was unfunded at closing, to be fully funded to EUR 4.0 million, resulting in an increase of the available credit enhancement to the notes.
However, since the April collection period, the financial position of some borrowers started to deteriorate, which can largely be attributed to the lockdown measures put in place by the Spanish Government as a response to the coronavirus pandemic. In April 2020, the Issuer agreed to defer the interest payment for six borrowers (totalling 14.5% of the portfolio outstanding balance) by one month. In May 2020, the Issuer has agreed to defer the interest payments of five borrowers (totalling 11.9% of the portfolio outstanding balance) by one month (interest payments of two of these borrowers were deferred for the previous month).
According to the servicer, as of 12 June 2020, one loan has become a defaulted loan, representing 1.3% of the current portfolio notional balance of EUR 264,980,000. In addition, the credit profile of certain borrowers has deteriorated in the last year resulting in downgrades of the credit estimates for such borrowers. This faster than expected deterioration reflects the disruption to the normal economic activity caused by the coronavirus.
As of 29 June 2020, the portfolio average credit quality measured by the DBRS Morningstar Risk Score stood at 28.2% (excluding the defaulted asset) compared with 25.7% at closing. The portfolio currently has five borrowers with a credit estimate equivalent to a CCC (high) rating (excluding the defaulted loan).
The rating action also reflects ongoing uncertainty regarding the financial strength of certain borrowers because of the ongoing restrictions still affecting some economic sectors such as hospitality and tourism.
DBRS Morningstar will continue to liaise with the servicer regarding borrower information to continue to monitor borrower performance and update its credit estimates as required.
DBRS Morningstar typically endeavours to resolve the status of ratings Under Review with Negative Implications as soon as appropriate. If heightened market uncertainty and volatility persist, DBRS Morningstar may extend the Under Review status for a longer period of time.
On 16 April 2020, the DBRS Morningstar Sovereign group released 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/361867/global-macroeconomic-scenarios-june-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings DBRS Morningstar’s 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.
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 or British pound sterling unless otherwise noted.
The principal methodology applicable to the ratings is: “Rating CLOs and CDOs of Large Corporate Credit” (28 February 2020).
DBRS Morningstar is undertaking a review and will remove the ratings from this status as soon as it is appropriate.
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.
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 the ratings include monthly investor and servicer reports provided by BNP Paribas Securities Services (the Loan Administrator) and Be-Spoke Capital (London) Limited (the Servicer).
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 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.
The latest rating action on this transaction took place on 21 November 2019, when DBRS Morningstar finalised its provisional ratings on the Class A, Class B, and Class C Notes.
The lead analyst responsibilities for this transaction have been transferred to Daniel Rakhamimov.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.
Ratings are Under Review with the Negative Implications designation. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. If heightened market uncertainty and volatility persist, DBRS Morningstar may extend the Under Review status for a longer period of time. Sensitivity analysis is not applicable.
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
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Daniel Rakhamimov, Senior Analyst
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 29 October 2019
DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
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The rating methodologies used in the analysis of these transactions can be found at: http://www.dbrsmorningstar.com/about/methodologies.
-- Rating CLOs Backed by Loans to European SMEs (8 July 2019) and SME Diversity Model v22.214.171.124, https://www.dbrsmorningstar.com/research/347780/rating-clos-backed-by-loans-to-european-smes.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019),
-- Cash Flow Assumptions for Corporate Credit Securitizations (28 February 2020),
-- Rating CLOs and CDOs of Large Corporate Credit (28 February 2020) and CLO Asset Model v2.2.3, https://www.dbrsmorningstar.com/research/357452/rating-clos-and-cdos-of-large-corporate-creditporate-credit-securitizations.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
-- Master European Structured Finance Surveillance Methodology (22 April 2020),
-- 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.
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019),
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 these credits or on this industry, visit www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.