Scope Ratings has assigned preliminary ratings to the notes to be issued by IM Grupo Banco Popular MBS 3, Fondo de Titulización on 11 December 2015 as follows:

Serie A (ISIN ES0305109003), EUR 702m: assigned new rating (P) A+_SF
Serie B (ISIN ES0305109011), EUR 198m: assigned new rating (P) B-_SF

IM GBP MBS 3, FT is a granular true sale securitisation of a EUR 900m portfolio of non-conforming first-lien mortgage-secured loans granted by Grupo Banco Popular (e.g. Banco Popular Español SA and its fully owned subsidiary, Banco Popular Pastor SA) to Spanish individuals, and resident and non-resident foreigners, by and large to finance the purchase of residential properties in Spain.

The ratings reflect: the legal and financial structure of the transaction; the quality of the underlying collateral in the context of the Spanish macroeconomic environment; the capability of Banco Popular as the servicer; counterparty risk arising from exposure to Banco Popular as the account bank and paying agent; and the management capability of Intermoney Titulización SGFT SA.

RATING RATIONALE

Credit enhancement provided by the structure is sufficient to support the class A rating and protect the notes against losses from a portfolio of mortgages we consider high-risk assets. The securitised mortgages can be labelled as ‘non-conforming’ because of very high original loan-to-value (LTV) ratios (i.e. above 85% and up to 130%), expected high probability of default and/or aggressive terms and conditions, such as very long maturities. Additionally, 3.5% of the portfolio is backed by commercial properties.

Scope’s outlook on the Spanish economy reflects positively on the class A, whereas significant fundamental imbalances of the Spanish economy over the long run threaten the class B notes due to its very long expected weighted average life of 28.3 years.

The ratings also reflect available excess spread and the possible impact of negative carry due to interest-reset risk and stressed servicing costs. The class B notes are more exposed to these risks due to their long life.

Scope has accounted for high asset-default risk by assuming an average lifetime 90-day default rate of 21.9%, a default-rate coefficient of variation of 48%, and a cure rate of 30%.

Scope also accounted for recovery risk resulting from a high weighted average current LTV ratio of 101.5%, and modelled a base-case recovery rate of 53.2% for the portfolio defaults. High LTV ratios reflect the market-price correction of domestic residential properties. Weighted average original LTV is 108.9%.

Banco Popular has limited servicer flexibility because of the already aggressive terms and conditions of the mortgages in this portfolio (i.e. high LTVs, exposure to foreigners, low interest rate margins, constant annuity amortisations, and long times to maturity). Furthermore, Banco Popular has adhered to the code of good banking practice (contained in law 1/2013) which limits the ability of the servicer to enforce security rights over mortgaged collateral, and we thus expect long recovery lags after default. Our analysis models a recovery lag of four years.

KEY RATING DRIVERS

Significant credit enhancement (positive). The loss-absorbing protection provided by the structure is high. Credit enhancement level for the senior notes in this transaction is 25%.

Simple structure protects liquidity (positive). The deal features a plain-vanilla, swapless, strictly-sequential, two-tranche structure with a combined priority of payments. The combined priority of payments supports timely class-A interest payments despite a thin cash reserve.

Stressed performance references (positive). Scope calibrated the portfolio-modelling default-rate assumptions with internal obligor default probabilities provided by Banco Popular, which allow for a strong credit risk discrimination between the assets.

Improving Spanish economy (positive). The Spanish economy is improving slowly, yet threatened by political uncertainty. This positive impact is less certain for class B notes, due to the fragility of the recovery and still significant fundamental imbalances.

Naturally hedged interest risk (positive). Almost all loans are referenced to 12-month Euribor (99.9%), or similar floating rate indices. All notes’ reference the 3-month Euribor rate, and margin-reset dates are uniformly distributed in the year.

Counterparty risk (negative). The class A rating is constrained in the A rating category because of excessive commingling risk exposure to the account bank, which would not be replaced unless it were rated below BB by Scope according to the documentation. Scope’s counterparty methodology assumes that risk substitution mechanisms at a loss of BB for a financial counterparty cannot support a rating above A_SF. Banco Popular is an eligible counterparty according to the private rating we have assigned to it.

High LTVs (negative). The current weighted average portfolio LTV is 101.5%, which negatively affects possible recovery proceeds.

Long time to maturity (negative). The portfolio will amortise slowly, making the transaction more vulnerable to future economic downturns. The weighted-average current remaining time to maturity is 29.1 years.

Severe exposure to foreigners (negative). Mortgages to foreigners represent 19.1% of the preliminary portfolio. This represents a severe selection bias in this portfolio. We have stressed the mean default rate for this portfolio to account for the higher default risk of foreign obligors.

Outdated property appraisals (negative). Appraisals between six months and up to 12 years before origination date of the respective mortgage represent 19.3% of the portfolio.

RATING STABILITY AND BREAK-EVEN ANALYSIS

Scope has tested the sensitivity of the model results to the main input parameters: mean default rate; default-rate coefficient of variation and recovery rate. Sensitivity stresses should not be considered indicative of expected or likely scenarios.

The rating of the class A is not sensitive to deviations from the base case modelling assumptions because counterparty risk limits the maximum rating possible for this transaction. In particular, the rating is not sensitive to 25% and 50% shifts of the default rate, 25% and 50% haircuts to the base case recovery rate, a coupled 25% increase of the default rate with a 25% haircut to the recovery rate, or to a 50% increase of the default-rate coefficient of variation.

The class B ratings would only lose a maximum of one notch after sensitivity stresses.
The break-even analysis also shows the robustness of the class A rating. The break-even portfolio ‘90 days past due’ default rate for the class A notes is 50.2% under a 31.3% recovery assumption or 38.5% under zero recoveries.

NOTES

A detailed rating report will be published by Scope on the closing date and will be freely available on www.scoperatings.com.

IMPORTANT INFORMATION

Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.

The rating analysis has been prepared by Martin Hartmann, Analyst.
Responsible for approving the rating: Guillaume Jolivet, Managing Director.

The rating concerns an issuer which was evaluated for the first time by Scope Ratings AG.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a mandate of the issuer of the investment as represented by IM Grupo Banco Popular MBS 3, Fondo de Titulización.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating
Offering circular and preliminary contracts; operational review presentations; delinquency and recovery vintage data; loan-by-loan preliminary portfolio information; legal opinion.

Scope Ratings considers the quality of the available information on the evaluated entity to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodology applicable for this rating is the ‘General Structured Finance Rating Methodology’, dated July 2014. The credit committee also applied the principles contained in ‘Rating Methodology for Counterparty Risk in Structured Finance Transactions’, dated 10 August 2015. Both files are available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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