London, 16 December 2011 -- Moody's Investors Service has today downgraded the ratings of two
senior tranches in two Spanish asset-backed securities (ABS) transactions,
PYME VALENCIA 1, FTA and PYME VALENCIA 2, FTA, which
are serviced by Banco de Valencia S.A. (Ba2/NP/E+).
The downgrades reflect operational risk concerns. The rating action
concluded the rating reviews of the two transactions.
As part of the review, Moody's also assessed the effect of the increased
commingling risk in these transactions since the downgrade of Banco de
Valencia to Ba2 on 28 October 2011.
A detailed list of the ratings affected by today's action appears
at the end of this press release.
RATINGS RATIONALE
Today's rating action reflects the lack of back-up servicer (BUS)
arrangements in place to support payments on the rated tranches in the
event of servicer disruption.
--LACK OF BUS ARRANGEMENT
Moody's notes that the transactions are exposed to operational risk as
there is no BUS arrangement in place to deal with a potential servicer
disruption. While PYME VALENCIA 2, FTA includes a trigger
to appoint a BUS upon the loss of the servicer's Baa3 rating, no
BUS has yet been appointed.
However, a mitigant to payment disruption risk is the role of Europea
de Titulización, the management company, that will
coordinate the appointment of a replacement servicer if Banco de Valencia
is not able to perform its duties. The management company also
acts as an independent cash manager and will be able to use available
funds, including the reserve fund, to support timely payments
on the notes in case of a temporary servicer disruption.
In taking today's rating action, Moody's has considered (i) the
level of liquidity available in the transactions; and (ii) the role
of the management company acting as (a) independent cash manager;
and (b) BUS facilitator to help support continuity of payments in case
of servicer default.
--LACK OF LIQUIDITY IN PYME VALENCIA 1, FTA
Moody's downgraded the senior notes of PYME VALENCIA 1, FTA to A2
(sf) because the transaction does not benefit from any liquidity source.
The reserve fund is fully depleted.
--SUFFICIENT LIQUIDITY AVAILABLE IN PYME VALENCIA 2,
FTA
PYME VALENCIA 2, FTA benefits from a large principal cash reserve
of EUR84.4 million and an interest cash reserve of EUR2.7
million, both deposited in Banco Popular Espanol, S.A.
(A2/P-1), representing, respectively, 35.5%
and 1.1% of the current pool balance.
Moody's believes that the current liquidity level in this transaction
is sufficient to support interest payments on the notes in the event of
a disruption in collections. In addition, the reserve fund
currently represents 55.6% of the senior notes balance,
which strongly mitigates a potentially prolonged absence of securitised
loan servicing. Such an extended period without loan servicing
could result in additional losses on the pool. As a result,
Moody's concluded with a maximum achievable rating of Aa3(sf) for
the senior notes of PYME VALENCIA 2, FTA 2.
--LIMITED IMPACT OF THE INCREASE IN COMMINGLING RISK
In addition, Moody's has concluded that the increased commingling
risk on these two transactions, following the downgrade of Banco
de Valencia, did not affect the ratings of the notes, given
the current credit enhancement levels versus the ratings on the notes.
--SWAP COUNTERPARTY REPLACED IN PYME VALENCIA 1, FTA
For PYME VALENCIA 1, FTA , BBVA (Aa3/P-1/B-)
replaced Banco de Valencia as swap counterparty.
There is no swap in place in PYME VALENCIA 2, FTA.
--POOR PERFORMANCE IN PYME VALENCIA 2, FTA
As part of its review, Moody's reassessed the portfolio quality
of PYME VALENCIA 2, FTA due to poor performance. In contrast,
PYME VALENCIA 1, FTA performance remained in line with expectations.
As of October 2011, cumulative 90+ day delinquencies for PYME
VALENCIA 2, FTA stood at 13.8% of the original balance
compared with a 15%.8 assumption over the life of the transaction.
Historically, this transaction has under-performed Moody's
Spanish SME delinquency index ("Spanish SME Indices - September
2011"). As of September 2011, 90- to 360-day
delinquencies represented 4.22% of the current pool balance,
compared with the weighted average index of 2.75%.
--KEY REVISED ASSUMPTIONS IN PYME VALENCIA 2, FTA
Moody's used the "top-down" approach to derive the default-rate
assumption, whereby an average through-the-cycle rating
for Spanish SMEs is determined and the rating is then adjusted on a loan-by-loan
basis by considering various factors, including the borrower sector,
repayment profile and the broader economic environment. As part
of its review, Moody's considered the exposure of the transaction
to the real estate sector (46% of the current pool as of September
2011 according to Moody's classification). As a result of the above,
Moody's assumed the default probability of SME debtors to be equivalent
to a rating in the single B-range for debtors operating in the
real estate sector and in the low Ba-range for the non-real-estate
debtors. At the same time, Moody's estimated the remaining
weighted average life of the portfolio to equal 5.2 years.
Consequently, the revised cumulative mean default assumption for
this transaction has increased to 24% of the current portfolio
balance (corresponding to 25% of original portfolio balance).
Given that the pool is less granular (with an effective number of borrowers
of 351), Moody's used a Monte Carlo simulation in CDOROM to derive
the gross default distribution. As a result, Moody's revised
the coefficient of variation of its default distribution to 42%.
Moody's assumptions for the average recovery rate and constant prepayment
rate (CPR) remain unchanged at 45% and 5%, respectively.
Although the quantitative rating model outcome is still equivalent to
Aaa, the downgrade of the PYME VALENCIA 2, FTA senior notes
reflects the lack of a BUS arrangement. As such, Moody's
today downgraded the class A notes to Aa3 (sf) from Aaa (sf). The
model outcome is consistent with current ratings on subordinated notes.
For PYME VALENCIA 1, FTA, key modelling assumptions,
sensitivities, cash-flow analysis and stress scenarios have
not been updated as today's rating action has been primarily driven
by the lack of liquidity and the lack of a BUS arrangement.
Uncertainty mainly stems from the lack of a back-up servicer in
these transactions. Banco de Valencia was intervened by Bank of
Spain as of 21 November 2011. Although this helps mitigate servicer
disruption in the short term, there is high uncertainty as of the
future of the entity. If the rating of Banco de Valencia is downgraded
further while no back-up agreement is in place, the ratings
would be negatively affected.
As noted in Moody's comment 'Rising Severity of Euro Area Sovereign Crisis
Threatens Credit Standing of All EU Sovereigns' (28 November 2011),
the risk of sovereign defaults or the exit of countries from the Euro
area is rising. As a result, Moody's could lower the maximum
achievable rating for structured finance transactions in some countries,
which could result in rating downgrades.
The methodologies used in these ratings were "Moody's Approach to Rating
CDOs of SMEs in Europe" published in February 2007, and "Moody's
Approach to Rating Consumer Loan ABS Transactions" published in July 2011.
Please see the Credit Policy page on www.moodys.com for
a copy of these methodologies.
During the review of PYME VALENCIA 2, FTA, Moody's used its
excel-based cash flow model, Moody's ABSROM™,
as part of its quantitative analysis of the transaction. Moody's
used CDOROM to model the cash flows and determine the loss for each tranche.
The Moody's CDOROM™ is a Monte Carlo simulation, which takes
the Moody's default probabilities as input.
Issuer: PYME VALENCIA 1, FTA
....A2, Downgraded to A2 (sf);
previously on Mar 25, 2011 Aa3 (sf) Placed Under Review for Possible
Downgrade
Issuer: PYME VALENCIA 2, FONDO DE TITULIZACIÓN DE ACTIVOS
....A, Downgraded to Aa3 (sf);
previously on Jun 30, 2011 Aaa (sf) Placed Under Review for Possible
Downgrade
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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.
The ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's did not receive or take into account a third party assessment
on the due diligence performed regarding the underlying assets or financial
instruments related to the monitoring of these transactions in the past
six months.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
two years preceding the credit rating action. Please see the special
report "Ancillary or other permissible services provided to entities
rated by MIS's EU credit rating agencies" on the ratings disclosure
page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
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.
Caroline Pichon
Associate Analyst
Structured Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Carole Gintz
VP - Senior Credit Officer
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades two Spanish ABS from Banco de Valencia due to operational risk
