DBRS Morningstar Assigns AA (sf) Rating to Class A Notes of Secucor Finance 2021-1 DAC

DBRS Ratings GmbH (DBRS Morningstar) assigned a rating of AA (sf) to the Class A Notes issued by Secucor Finance 2021-1 DAC (the Issuer).

DBRS Morningstar does not rate the Class B VFN also issued in the transaction.

The rating addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date.

The Issuer is a securitisation programme of amortising consumer loans, store card charge loans, and limited revolving credit facilities granted to the customers of the El Corte Inglés S.A. group in Spain and serviced by the captive finance company, Financiera El Cortes Ingles E.F.C., S.A. (the originator and servicer). The Issuer’s assets include the eligible assets from Secucor Finance 2013-I DAC whose Class A notes were fully repaid and the related rating was discontinued in June 2021.

DBRS Morningstar based its rating on the following analytical considerations:
-- The transaction’s capital structure, including form and sufficiency of available credit enhancement to support DBRS Morningstar’s expectation of charge-off, principal payment, and yield rates under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A Notes.
-- The originator and its parents’ financial strength and its capabilities with respect to origination and underwriting.
-- An operational risk review of the originator, which DBRS Morningstar deems to be an acceptable servicer.
-- The transaction parties’ financial strength regarding their respective roles.
-- The credit quality, diversification, and historical and projected performance of the securitised portfolio.
-- DBRS Morningstar’s sovereign rating of the Kingdom of Spain at “A” with a Stable trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

TRANSACTION STRUCTURE
The transaction has a 36-month revolving period scheduled to end in July 2024. The transaction is a cross-border structure where the receivables are governed under the Spanish laws and the Issuer is an Irish special-purpose vehicle.

The transaction features borrowing base calculations and dynamic credit enhancement from the Class B VFN, various reserves, and excess spread to 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 to cover the merchandise disputes, rebates, and fraud with a floor of 3%.

In addition, there is a loss reserve based on the weighted average of loss reserve factor of each loan type and together with the dilution reserve, an asset factor is derived to determine 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.

The transaction also includes a reserve that is available to cover the 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.

COUNTERPARTIES
Banco Santander S.A. is the issuer account bank for the transaction. Based on DBRS Morningstar’s ratings of Banco Santander S.A. and the downgrade provisions outlined in the transaction documents, DBRS Morningstar considers the risk arising from the exposure to the issuer account bank to be commensurate with the rating assigned.

Banco Santander S.A. and CaixaBank S.A. are the collection account banks for the transaction. As they are not party to the securitisation documents, they are not subject to any replacement rating thresholds.

PORTFOLIO ASSUMPTIONS, COVID-19 CONSIDERATIONS, AND KEY DRIVERS
While the originator has a long lending history of many loan types, the performance of direct loans to date has been short, and non-existing for Evolve loans, which are yet to be launched. DBRS Morningstar, therefore, benchmarked the portfolio performance to comparable consumer loan portfolios in Spain and elected to derive its assumptions of lifetime gross default and recovery of each loan type from the historical dynamic charge-offs and/or detailed vintage data, if applicable.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to increases in unemployment rates and adverse financial impact on many borrowers. DBRS Morningstar anticipates that delinquencies could continue to rise in the coming months for many structured finance transactions, some meaningfully. The ratings are based on additional analysis and, where appropriate, adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar incorporated a moderate reduction in the expected recovery rate.

While the receivables are exposed to potential set-off by the borrowers, DBRS Morningstar considers this risk to be nominal as the originator currently does not take deposits or offer any insurance policy.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

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 last updated on 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-2021-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.

On 8 May 2020 and 17 June 2020, DBRS Morningstar published commentaries outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated ABS transactions in Europe. For more details, please see these commentaries: https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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 regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 rating is: “Rating European Consumer and Commercial Asset Backed Securitisations” (3 September 2020).

Other methodologies referenced in these transactions 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 the 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” at: https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.

The data and information used for the rating include performance and portfolio data provided by the originator through the arranger, Banco Santander, as follows:
-- Monthly receivables balances, collections, returns, delinquencies, gross charge-off rates, and additional purchases from January 2011 to April 2021;
-- Monthly static gross losses and net losses for the direct loans from March 2018 to January 2021;
-- A portfolio pool cut and related stratification tables as at 31 May 2021.

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 this rating 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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:

-- Expected Default Rate of 4.4%
-- Expected Loss Given Default (LGD) of 85%
Scenario 1: 100% Expected LGD
Scenario 2: a 25% decrease in the Expected Default Rate
Scenario 3: a 50% decrease in the Expected Default Rate
Scenario 4: a 25% decrease in the Expected Default Rate and 100% Expected LGD
Scenario 5: a 50% decrease in the Expected Default Rate and 100% Expected LGD
DBRS Morningstar concludes that the expected ratings under the five stress scenarios are:
-- Class A Notes: AA (sf), AA (sf), A (sf), A (high) (sf), A(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.

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

Lead Analyst: Roberto Perez, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 July 2021

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 this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (21 July 2020), https://www.dbrsmorningstar.com/research/364305/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021), https://www.dbrsmorningstar.com/research/376314/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020), https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- 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.

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.