The definitive credit rating assigned the senior tranche issued in the dynamic SME loan securitization transaction has reached the maximum AAA(ru.sf) due to credit support provided to the senior tranche by the subordinated (junior) tranche and the satisfactory credit quality of the securitized portfolio.
- The AAA(ru.sf) credit rating has been assigned to the RUB 5,000 m Collateralized Fixed Rate Notes due October 31, 2033.
ACRA did not assign a credit rating to the junior tranche (subordinated loan).
As part of the previous rating action (August 30, 2018), ACRA assigned the expected credit rating of eAAA(ru.sf) to the above notes. In compliance with standard procedure, ACRA assigned the definitive rating to the notes after receipt of the final version of issuance documentation and other documents on the transaction.
The notes were issued by “SPE TKB SME 1” LLC (hereinafter, the Issuer) as part of the securitization transaction of the portfolio of loans issued by TRANSKAPITALBANK (not rated by ACRA) (hereinafter, TKB, or the Bank) to small and medium-sized enterprises (SMEs).
The issuer issued ruble-denominated fixed rate notes. Proceeds from the issue were used to purchase the portfolio of ruble-denominated loans granted by the Bank to SMEs. Receivables acquired by the Issuer on SME loans form a part of the collateral of the notes. The main source of payments on the rated notes consists of repayments from the underlying loans.
This transaction is the first issuance of collateralized notes secured by a portfolio of loans issued by the Bank to SMEs and the Bank’s first structured finance transaction that received a credit rating from ACRA. Credit Europe Bank Ltd. (BBB(RU), outlook Positive) acted as the Back-up Servicer, ready to service the portfolio in the case of TKB’s bankruptcy, withdrawal of its banking license, or untimely or poor services by the Bank. The transaction is dynamic and new loans may be included into the securitized portfolio instead of repaid loans within two years of the issue of the collateralized notes, subject to certain terms and conditions.
This transaction is not based on STC securitization standards and sets forth no coverage of any losses at the expense of the state budget and/or third-party guarantees.
The Issuer is a statutory defined bankruptcy remote special purpose entity operating in accordance with the requirements of Federal Law № 379-FZ dated December 21, 2013, “On Amending Certain Legislative Acts of the Russian Federation.” The sole purpose of the Issuer is the acquisition of receivables arising from loans granted to legal entities as well as the issuance of collateralized notes.
The assigned credit rating reflects ACRA’s opinion on the expected losses posed to investors by the notes’ legal final maturity. In accordance with the “Methodology for Assigning Credit Ratings to Structured Finance Instruments and Obligations on the National Scale for the Russian Federation,” ACRA conducted its analysis in two stages. At the first stage, as a result of the analysis of the Issuer’s securitized assets, ACRA calculated the probability of default for the securitized portfolio. The calculated value of the mathematical expectation of default probability for the initial and replenishment portfolios amounted to 8.2% and 24.8%, respectively, with a standard deviation of 4.3%. At the second stage, the portfolio metrics were used as input parameters in modelling the Issuer’s liability structure to determine the expected loss on the rated notes taking into account the impact of credit enhancement mechanisms, projected recovery rates, expected prepayments, and other factors influencing the distribution of cash flows in the transaction.
The most significant factors determining the expected loss on the SME loan portfolio are the following:
- The long average weighted life of borrowers: 11.4 years (68% of borrowers were registered before June 1, 2008);
- The industry profile of the obligors: 37% of the portfolio are borrowers operating in industries that, in ACRA’s opinion, demonstrate higher levels of default, relatively high industry correlation, and a high level of dependence on the economic cycle trends (for example, construction, real estate management, investment and financial operations); eligibility criteria allow for a moderate increase in the share of such borrowers within the replenishment period;
- The size of borrowers: 54.1% of the portfolio are borrowers categorized as microenterprises (as per ACRA classification); eligibility criteria allow for a moderate increase in the share of such borrowers within the replenishment period;
- The positive credit history of the majority of borrowers: no loans in the securitized portfolio have been in arrears for more than 30 days since their origination, and 93% of loans have never been in arrears; eligibility criteria prohibit the inclusion into the collateral during the replenishment period of loans that were in arrears for more than 59 days;
- The moderate liquidity of the collateral: a significant share of the loans is unsecured or partially secured by liquid collateral such as real estate, transport vehicles, or equipment;
The loan amortization profiles: the repayment of a substantial part of the loans is made at their legal final maturity; a significant part of the loans is represented by revolving credit lines.
The rated notes benefit from subordination, i.e. the priority of note payments is determined by their seniority to other obligations of the Issuer. The subordination of the rated notes is provided by the subordinated loan to cover part of the purchase price of the collateral portfolio in the amount of 27% of the assets granted to the Issuer by the Bank. Additional credit support for the notes is provided by the Reserve Fund, formed before the note issuance date in the amount of 5.46% of the rated issuance. The Reserve Fund can be amortized in proportion to the par value of the rated notes to the floor amount of RUB 100 mln, subject to certain criteria. Throughout the life of the transaction, the Reserve Fund is one of the main sources of liquidity for the compensation of short-term delinquencies of interest revenues for note payments, as well as for senior expenses. However, in certain cases, the Reserve Fund can also serve as a source of credit support for the rated notes. In particular, the Reserve Fund is included in the collateral of the notes, and in the case of the notes early repayment, at the request of noteholders, the Reserve Fund can be used to compensate insufficient principal proceeds for the full repayment of the nominal value of the notes to investors.
The transaction structure provides for the simple sequential payment waterfall. Within the replenishment period, the principal proceeds from the loans are used to purchase new assets that meet the eligibility criteria. At the end of the replenishment period, these proceeds are used to amortize the notes. No other liabilities of the Issuer will be repaid until full redemption of the notes. In ACRA’s opinion, the structure of this transaction allows for the timely payment of coupons and repayment of the nominal value of the notes until their legal final maturity.
Model sensitivity analysis shows the possible changes in ACRA’s initial ratings assigned to notes based on changes in basic assumptions in the model. As alternative input parameters, ACRA used the stress values of the expected default probability, the recovery rates, and the levels of prepayment, all characteristic of significant deterioration in macroeconomic conditions as compared to the baseline scenario.
At the time the credit rating was assigned, the results obtained using the GRASP model indicated that the AAA(ru.sf) rating could withstand an increase in the expected default probability from 8.2% to 18.8%, provided that all other factors remained unchanged. Similarly, results showed that the rating could withstand a decrease in the level of portfolio compensation from 23% to 16%, provided that all other factors remained unchanged. The analysis also showed that the maximum decline in the credit rating in the most stressful modelling scenarios did not exceed four notches.
Potential rating change factors
A negative rating action may be prompted by developments that include the following:
- Deterioration of macroeconomic conditions beyond the stressed scenarios used in the rating analysis;
- An increase in payment delinquencies and losses in the portfolio, exceeding the parameters used in the rating analysis;
- Unforeseen changes in legislation that could have a significantly negative impact on the transaction;
- Inability to replace Issuer’s Account Bank upon its downgrade.
The definitive credit rating has been assigned under the national scale of the structured finance sector for the Russian Federation and is based on the Methodology for Assigning Credit Ratings to Structured Finance Instruments and Obligations on the National Scale for the Russian Federation and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The definitive credit rating has been assigned to collateralized notes issued by “SPE TKB SME 1” LLC for the first time.
The credit rating was assigned based on the data provided by TKB, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and TKB participated in the rating process.
No material discrepancies between the provided information and the data officially disclosed by TKB in its financial statements have been discovered.
ACRA provided no additional services to TKB or “SPE TKB SME 1” LLC. No conflicts of interest were identified in the course of the credit rating process.
The press release on the expected rating assignment was published on August 31, 2018.