Rating action

Scope Ratings GmbH (Scope) has performed the following rating actions after completing a monitoring review on the notes issued by Hefesto STC S.A. - Guincho Finance

Class A (ISIN PTHEFZOM0001): EUR 0.0m: withdrawn at A+_SF

Class B (ISIN PTHEF1OM0004): EUR 13.0m: upgraded to BBB_SF from BB-_SF

Class J (ISIN PTHEF2OM0003): EUR 25.0m: not rated

Scope’s review was based on servicer, investor and payment reporting as of the May 2023 payment date.

Transaction overview

Hefesto STC S.A. - Guincho Finance is a static cash securitisation of a Portuguese non-performing loan portfolio worth around EUR 482m by gross book value at closing. The portfolio was originated by Banco Santander Totta S.A. The special servicers are Whitestar Asset Solutions S.A. and HG PT Unipessoal Lda (Hipoges) . The master servicer is Whitestar Asset Solutions S.A. The transaction closed on 16 November 2018.

Gross collections amount to EUR 111.8m as of the May 2023 payment date and are mostly from legal proceeds (67.6%) and amicable resolution proceeds (17.5%). The remaining collections stem from REO sales (13.5%) and other types of proceeds (1.4%).

About 36.4% of gross collections (EUR 40.7m) are from closed debtors (i.e. debtors whose recovery process is complete). Out of this subset of collections, most were obtained through legal or amicable resolution proceedings (88.5%). Since closing, Scope estimates that 42.8% of the initial gross book value has been closed.

Since closing, the class A note has fully repaid and the class B note by 7% of its notional. The reported cumulative collection and net present value profitability ratios are 101.2% and 155.4% respectively as of May 2023.

Rating rationale

The review addressed i) the collateral’s observed performance as of May 2023; ii) Scope’s forward-looking assumptions, which incorporate expected macroeconomic changes over the transaction’s remaining life; iii) updates to the transaction’s liability structure, liquidity and interest rate hedging; and iv) the issuer’s exposure to key transaction counterparties.

Beyond the key rating drivers addressed further below, the main analytical considerations on the transaction’s performance are:

High profitability of secured positions (positive)¹. Closed secured debtors account for around 37.4% of the transaction’s initial secured gross book value. The profitability on these debtors (136%) is above Scope’s expectations under the B case assumptions at closing.

Faster-than-expected cumulative collections (positive)¹. Net collections (net of expenses and servicing fees) totalling EUR 100.2m have outpaced Scope’s timing assumptions under the B case at closing. Based on the servicer’s business plan, aggregate net collections are 101% of the original cumulative net expectations.

Low recovery expenses (positive)¹. Cumulative recovery expenses, at 4.7% of cumulative gross collections, are well below the initial business plan’s and Scope’s lifetime assumption.

Business plan figures revised up (positive)¹. Figures in the transaction’s original business plan have been revised up. The latest business plan (May 2023) has a higher net lifetime recovery rate (net of expenses and servicing fees) by 9.8% from its closing value.

Key rating drivers

The transaction’s rating drivers disclosed on Scope’s last rating action release dated 29 September 2022 continue to apply (to the extent that they relate class B, as class A has already fully amortised). In addition, we have incorporated a new negative rating driver, which limits further upside on the class B rating, despite the very positive observed transaction performance to date:

Class B rating upside constraints (negative)¹: The class B rating partly reflects the historical volatility of collections, increased borrower concentration and potential tail risk of the remaining portfolio. Volatility: a major part of future expected collections derives from borrowers managed by Hipoges, which have shown significant volatility in the past. Concentration: future expected business plan gross collections show concentrations of 22.8% and 39.8% from one and three borrowers, respectively. Tail risk: With the remaining collateral of the portfolio decreasing, the transaction might be exposed to collateral of lower quality, resulting in longer work out processes and/or lower recoveries than initially assumed.

Quantitative analysis and assumptions

Scope analysed cash flows reflecting the transaction’s structural features to calculate each tranche’s expected loss and weighted average life. Scope analysed the assets to produce a rating-conditional cash flow projection of gross recoveries for defaulted loans.

Scope has updated its modelling assumptions to reflect the transaction’s current performance. At the B case, Scope assumed a lifetime gross recovery rate of 32.3% over a weighted average life of 3.7 years (from its closing value of 27.3% over 3.2 years).

Sensitivity analysis

Scope tested the resilience of the rating to deviations in expected recovery rates and recovery timing. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the results for the class B note would change compared to the assigned rating in the event of:

• 10% haircut to recoveries, zero notches;
   
• Longer recovery by one year, zero notches;

References
1. Transaction documents and reporting (Confidential)

Stress testing
Stress testing was performed by applying Credit-Rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow Structured Finance Expected Loss Model Version 1.1 incorporating relevant asset assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for these Credit Ratings, (Non-Performing Loan ABS Rating Methodology, 3 August 2023; Counterparty Risk Methodology, 13 July 2023; General Structured Finance Rating Methodology, 25 January 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings is (Cash Flow Structured Finance Expected Loss Model Version 1.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Rated Entity and its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment at closing. The external due diligence assessment was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Martin Hartmann, Director
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
The final Credit Ratings were first released by Scope Ratings on 16 November 2018. The Credit Ratings were last updated on 29 September 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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