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Rating Action:

Moody's assigns provisional ratings to Aqua Finance No. 4 issuance of Asset Backed Securities

22 Jun 2017

Milan, June 22, 2017 -- Moody's Investors Service ("Moody's") has assigned the following provisional ratings to notes to be issued by Tagus -- Sociedade de Titularizacao de Creditos, S.A. (the "Issuer"):

....EUR [.] million Class A Asset Backed Floating Rate Notes due June 2035, Assigned (P)A3 (sf)

....EUR [.] million Class B Asset Backed Floating Rate Notes due June 2035, Assigned (P)Ba2 (sf)

Moody's has not assigned a rating to the EUR [.] million Class C Notes, which are also to be issued at the closing of the transaction.

RATINGS RATIONALE

This transaction is a 18 months revolving securitization transaction originated by Montepio Credito - Istitucao Financeira de Credito S.A. (NR) ("Montepio Credito"), ultimately owned by Caixa Economica Montepio Geral (B3/NP/B1 (cr)/NP (cr)) ("Montepio"). The assets supporting the notes consist of secured and unsecured loan, leasing, rental and long term rental agreements. The financing are mainly entered into for the purpose of financing cars and commercial trucks (90%) to corporate obligors (60.8%) and private individuals (39.2%) in Portugal.

As of 5 May 2017, the provisional pool was around EUR 193.2 million and shows 22,159 non-delinquent contracts with a weighted average seasoning of around 18 months. The financing in the portfolio finance commercial trucks (31.8%), new cars (31%) and used cars (27.2%) to corporate obligors and private individuals. Financing are 97.7% amortizing, the remaining 2.3% are bullet.

Under the leasing and rental agreements (60.9%), the originator/issuer has the right to sell the related vehicle to the relevant supplier should the obligor not exercise its purchase option at maturity, the benefit of such proceeds from the suppliers obligation to purchase ("Promissory Agreements") is part of the financing agreement and is passed to the issuer under the transfer agreement. Promissory Agreements represents 14.4% of the portfolio at closing and cannot increase to more than 16.5% during the revolving period.

The originator will also act as the servicer of the portfolio during the life of the transaction; a backup servicer is appointed at closing and will step in should the servicer defaults. The transaction also envisages an independent cash manager. This is the sixth public transaction originated by Montepio Credito, the second rated by Moody's.

RATINGS RATIONALE

The ratings of the notes are based on an analysis of the characteristics of the underlying pool, sector wide and originator specific performance data, protection provided by credit enhancement, the cash reserve, the roles of external counterparties and the structural integrity of the transaction.

According to Moody's, the transaction benefits from credit strengths such as (i) a backup servicer: Whitestar Asset Solution, S.A. is appointed at closing as back up servicer and will step in should the servicer default; (ii) Promissory Agreements: under the Promissory Agreements the Issuer has the option to sell the related asset to the supplier at a pre agreed price. Moody's has considered this obligation in the residual value analysis; (iii) short WAL of the corporate exposure: the corporate portion of the pool have a shorter WAL than the individual portion, 1.4 years vs 4.2 years, as such the riskier commercial exposure will reimburse earlier than the individual portion. During the revolving period, WAL and obligors limits prevent the portfolio to change substantially; (iv) A non-amortising cash reserve of 5% of the Class A Notes is fully funded at closing. This reserve will provide liquidity during the life of the transaction to pay senior expenses, coupons on Class A Notes and to clear Class A notes principal deficiency ledger; will be available also to interest of Class B Notes once Class A Notes are fully amortized. In addition, the contractual documents will include the obligation of the calculation agent to estimate amounts due to Class A notes interest payments in the event that a servicer report is not available. This reduces the risk of any technical non-payment of interest on the Notes.

However, Moody's notes that the transaction features some credit weaknesses such as (i) corporate exposure and concentrations: 60.8% of the pool is exposed to corporates, and among them there is a high concentration to the top 10 borrowers and to the Transportation sector, 19% and 51.9% of the corporate exposure respectively. Moody's has considered the concentrations when deriving the default probability and PCE assumption for the transaction, as further described below.; (ii) exposure to affiliates: 4.1% of the pool is exposed to affiliates of the originator (i.e. corporates connected to the originator), out of which 3.4% are partially mitigated through Promissory Agreements and 0.74% are solely exposed to the affiliate. These affiliate exposures create a linkage between the originator and the pool since should the originator default it increases the likelihood that the affiliates will also default on their obligations.; (iii) revolving period: the pool is revolving for 18 months which could lead to an asset quality drift although this is mitigated to some extent by the portfolio concentration limits; (iv) unhedged transaction: the pool is comprised of 41.3% fixed rate loans and 58.7% floating rate loans, mostly paying monthly (99.8)%. The notes are floating rate and pay a monthly coupon linked to EURIBOR 3M. Although the transaction is unhedged, the note coupons have an in-built cap at a EURIBOR rate of 5%, i.e. the note coupons are linked to EURIBOR 3M until it reaches 5%. When stressing the yield vector in our analysis we have considered the asset liability mismatch up to this cap.

Moody's analysis focused, among other factors, on (i) an evaluation of the underlying portfolio of financing agreements; (ii) the macroeconomic environment; (iii) historical performance information; (iv) the credit enhancement provided by subordination, non-amortizing reserve and excess spread; (v) the liquidity support available in the transaction, by way of principal to pay interest and the reserve fund; and (vi) the legal and structural integrity of the transaction.

MAIN MODEL ASSUMPTIONS

In its quantitative assessment and because of the relative high industry concentration and the low granularity of the securitised portfolio, Moody's assumed a custom default distribution for this securitised portfolio.

The rating agency derived the default distribution, namely the relevant main inputs such as the mean default probability and its related standard deviation, via the analysis of: (i) the characteristics of the loan-by-loan portfolio information, complemented by the available historical vintage data; (ii) the potential fluctuations in the macroeconomic environment during the lifetime of this transaction; and (iii) the portfolio concentrations in terms of industry sectors and single obligors.

Moody's assumed the mean cumulative default probability of the portfolio to be equal to around 7.2% with a coefficient of variation (i.e. the ratio of standard deviation over mean default rate) of around 59.7%.

The rating agency has assumed stochastic recoveries with a mean recovery rate of 26%, a standard deviation of 30% and a weighted average recovery time of around 18 months after the default occurrence. In addition, Moody's has assumed the prepayments to be 5% per year. The base case mean loss rate and the coefficient of variation assumption results in a portfolio credit enhancement ("PCE") of around 22.4%.

Portfolio expected defaults of 7.2% are higher than the EMEA Auto Loan ABS average and are based on Moody's assessment of the lifetime expectation for the pool taking into account (i) SME obligors exposure and their concentration to the top 10 obligors and the Transportation sector; (ii) historic performance of the financing book of the originator, (iii) benchmarking against comparable transactions, and (iv) other qualitative considerations, such as the 18 months revolving period.

Portfolio expected recoveries of 26% are in lower than EMEA Auto Loan ABS average and are based on Moody's assessment of the lifetime expectation for the pool taking into account (i) historic performance of the loan book of the originator, (ii) benchmark transactions, and (iii) other qualitative considerations.

PCE of 22.4% is higher than the EMEA Auto Loan ABS average and is based on Moody's assessment of the pool which is mainly driven by (i) the SME exposure and their concentration to the top 10 positions and Transportation sector; and (ii) benchmarking against comparable transactions.

The transaction is also exposed to potentially higher losses in a stressed environment due to Residual Value ("RV") risk included in the portfolio stemming from the leasing and rental agreements. As described above, in case the obligor does not exercise its option to purchase the related asset and the supplier default on their Promissory Agreements, the transaction is exposed to RV risk. RV losses are additional to the cumulative mean net loss assumptions for borrower receivables detailed in the previous section. Promissory Agreements receivables constitute 14.4% of the principal balance of the securitised portfolio and can rise to 16.5% during the revolving period.

Moody's assumes an A1 haircut for the RV exposure in the portfolio of 57% for the Class A Notes and an Ba2 haircut for RV exposure of 27% for the Class B Notes, taking into account (i) the maturity distribution of RV payments, and (ii) the fact that the RV exposure is mainly linked to trucks.. The final results also take into account the benefit given to the Promissory Notes agreements based on the creditworthiness of the suppliers granting it. The analysis results in an RV credit enhancement of 5.9% for the (P) A3 (sf) rated Class A Notes and 2.9% for the (P) Ba2 (sf) rated Class B Notes. The RV credit enhancement is added to the calculated credit enhancement for the obligor credit risk for each tranche of notes.

METHODOLOGY

The principal methodology used in these ratings was "Moody's Global Approach to Rating Auto Loan- and Lease Backed ABS" published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Please note that on 22 March 2017, Moody's released a Request for Comment, in which it has requested market feedback on potential revisions to its Approach to Assessing Counterparty Risks in Structured Finance. If the revised Methodology is implemented as proposed, the Credit Ratings on Aqua Finance No. 4 are not expected to be affected. Please refer to Moody's Request for Comment, titled " Moody's Proposes Revisions to Its Approach to Assessing Counterparty Risks in Structured Finance," for further details regarding the implications of the proposed Methodology revisions on certain Credit Ratings.

The rating addresses the expected loss posed to investors by the legal final maturity of the Notes. In Moody's opinion the structure allows for timely payment of interest and for ultimate payment of principal at par on or before the rated final legal maturity date for Class A Notes and for ultimate payment of interest and principal at par on or before the rated final legal maturity date for Class B Notes. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed but may have a significant effect on yield to investors.

Moody's issues provisional ratings in advance of the final sale of securities and the above rating reflects Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation and the final note structure, Moody's will endeavor to assign a definitive rating to the Notes. A definitive rating may differ from a provisional rating.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:

Factors that may lead to and upgrade of the ratings of the notes include significantly better than expected performance of the pool and an increase in credit enhancement of the notes due to deleveraging.

Factors that may lead to a downgrade of the ratings of the notes include (i) a decline in the overall performance of the pool (ii) a significant deterioration of the credit profile of the originator/servicer or other key transaction counterparties.

LOSS AND CASH FLOW ANALYSIS:

Moody's used its cash-flow model Moody's ABSROM as part of its quantitative analysis of the transaction. Moody's ABSROM model enables users to model various features of a standard European ABS transaction - including the specifics of the loss distribution of the assets, their portfolio amortization profile, yield as well as the specific priority of payments, swaps and reserve funds on the liability side of the ABS structure.

STRESS SCENARIOS:

In rating auto loan ABS, default rate and recovery rate are two key inputs that determine the transaction cash flows in the cash flow model.

If the expected recovery rate decreased to 20% from 26% the model output indicates that the Class A notes would achieve A3 assuming that all other factors remained unchanged. Class B would achieve a Ba3. Moody's Parameter Sensitivities provide a quantitative/model-indicated calculation of the number of rating notches that a Moody's structured finance security may vary if certain input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged and is not intended to measure how the rating of the security might migrate over time, but rather how the initial rating of the security might have differed if key rating input parameters were varied. Parameter Sensitivities for the typical EMEA ABS Auto loan transaction are calculated by stressing key variable inputs in Moody's cash flow model.

Parameter sensitivities provide a quantitative/model indicated calculation of the number of notches that a Moody's rated structured finance security may vary if certain input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged. It is not intended to measure how the rating of the security might migrate over time, but rather how the initial model output for the Notes might have differed if the two parameters within a given sector that have the greatest impact were varied.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Moody's describes its loss and cash flow analysis in the section "Ratings Rationale" of this press release.

Moody's describes the stress scenarios it has considered for this rating action in the section "Ratings Rationale" of this press release.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Francesca Pilu
Asst Vice President - Analyst
Structured Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anthony Parry
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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