Senior tranche issued in this dynamic loan portfolio securitization transaction achieved eAAA(ru.sf) by ACRA due to the credit support from the subordinated (junior) tranche and the satisfactory credit quality of the securitized portfolio.
- Expected rating eAAA(ru.sf) assigned to RUB 5,748 mln Collateralized Fixed Rate Notes due October 31, 2033.
The junior tranche in the form of a subordinated loan was not rated by ACRA.
SFE TKB SME 1 LLC (“Issuer”) will issue the notes secured by the portfolio of loans granted by TRANSKAPITALBANK (hereinafter, TKB or the Bank) to small- and medium-sized enterprises (SMEs).
The Issuer will issue ruble denominated fixed rate notes. Proceeds from the issue will be used to purchase the portfolio of ruble denominated loans granted by the Bank to SMEs. Loan receivables acquired by the Issuer will form part of the collateral for the notes. The main source of payments on the rated note will be repayments from the underlying borrowers.
The transaction is the Bank’s first structured finance transaction that received an expected credit rating from ACRA, first issue of collateralized notes securitized by a portfolio of loans granted by the Bank to SMEs. A major Russian bank having a significant experience in lending and servicing SMEs and benefiting from the branch network covering all key economic clusters and regions of Russia will act as a backup servicer, ready to service the portfolio in case of untimely or poor services by the Bank, its bankruptcy or withdrawal of its banking license. The transaction is dynamic: new loans may be included into the securitized portfolio in replacement of repaid loans within two years after the issue of the collateralized notes, subject to certain terms and conditions.
The transaction is not part of STS securitization standards, and it sets forth no coverage of any losses at the expense of the government budget and / or external guarantees from third parties.
The Issuer is a statutory defined bankruptcy remote special purpose vehicle incorporated as a limited liability company in compliance with the statutory requirements outlined in Russian Federal Law No. 379–FZ “Amending certain laws of the Russian Federation” dated December 21, 2013. The Issuer’s only two purposes are the acquisition of receivables arising from loans granted to legal entities and the issuance of collateralized notes.
The expected 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, ACRA estimated that the probability of default for the securitized portfolio, with the mathematical expectation of 9.5% and the standard deviation of 4.6%. At the second stage, the portfolio metrics were used as input parameters in modeling the structure of the Issuer's obligations and determining the expected losses on the rated notes, taking into account the impact of credit enhancement mechanisms, expected prepayments and other factors impacting cash flow distribution in the transaction.
The most significant factors that determined the portfolio expected losses are:
- long weighted average life of borrowers: 11.5 years, 56.5% of borrowers were registered before June 01, 2008;
- industry profile of borrowers: 35.3% of the portfolio are borrowers operating in industries which, in ACRA's opinion, demonstrate increased levels of default, comparably high industry correlation and increased dependence on the economic cycle trends (including, construction, real estate management, investments and finances); eligibility criteria allow for moderate increase in the share of such borrowers within the reinvestment period;
- size of borrowers: 47.1% of the portfolio are borrowers categorized as micro-enterprise (as per ACRA classification); eligibility criteria allow for moderate increase in the share of such borrowers within the reinvestment period;
- positive credit history for most borrowers: no loans in the securitized portfolio have been in arrears for more than 30 days since their origination, 97% of loans have never been in arrears, and 99% of loans have never been in arrears for more than 30 days; eligibility criteria do not allow loans in arrears for more than 59 days to be included in the collateral within the reinvestment period;
- moderate liquidity of collateral: a significant share of loans is unsecured or secured partially by liquid collateral, such as real estate, transport vehicles, equipment;
- loan repayment profile: a significant share of loans will be repaid at their legal final maturity; a significant share of loans includes revolving lines of credit.
The rated notes benefit from subordination, i.e. the priority of note payments is determined by their seniority against other obligations of the Issuer. The subordination to the rated notes is provided by the subordinated loan to be granted by Bank to the Issuer to cover 27% of securitized portfolio purchase price. An additional credit support to the notes will be provided by the Reserve Fund (5.1% of the rated issuance) formed before the note issue date. The Reserve Fund may be drawn down in proportion to the par value of the rated notes, subject to the floor amount equal to RUB 100 mln and provided that the draw down criteria are met. During the entire life of the transaction, the Reserve Fund will be one of the main sources of liquidity that may be used to compensate short-term delinquencies of interest payments to make payments under the notes and Issuer’s senior expenses. In certain situations, the Reserve Fund may also be a source of credit support for the notes. In particular, in case of early repayment of the notes at the request of noteholders, the Reserve Fund can be used to compensate insufficient principal proceeds in order to fully repay the rated notes.
According to the transaction’s priority of payments, the cash flows will be distributed via a simple sequential payment waterfall. Within the reinvestment period, the principal proceeds from the loans will be used to purchase other eligible assets. After the expiration of the reinvestment period, such proceeds will be used to repay principal due on the notes. No other liabilities of the Issuer will be repaid until complete redemption of the notes. In ACRA's opinion, such arrangement will allow for timely payment of interest and ultimate payment of principal on the notes until their legal final maturity.
Model sensitivity analysis shows possible changes in the initial ACRA ratings assigned to notes, depending on changes in the underlying model assumptions. As alternative input parameters, ACRA used the stress values of the expected probability of defaults, losses and prepayments on the securitized portfolio, reflecting significant deterioration in macroeconomic conditions as compared to the base case scenario.
At the time the expected rating was assigned, the analysis indicated that, all else being equal, the expected rating eAAA(ru.sf) could withstand the increase of portfolio default probability to 11.5% from 9.5%. Similarly, the rating eAAA(ru.sf) would hold if portfolio repayments fall 21% from 23%. The sensitivity analysis also showed that the maximum decline in the rating did not exceed [two] notches in the most stressful scenarios modelled.
Potential rating change factors
A negative rating action may be prompted by the developments that include the following:
- Deterioration of the macroeconomic conditions beyond the stress scenarios used in the rating analysis;
- Increase in payment delinquencies and losses in the portfolio, at the levels exceeding those modelled as part of the analysis;
- Unforeseen legislative changes negatively affecting the transaction;
- Inability to replace Issuer’s Account Bank upon its downgrade.
The expected credit rating was assigned under the national scale for the Russian Federation based on the ACRA 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 expected credit rating was assigned to the collateralized notes issued by SFE TKB SME 1 LLC for the first time. ACRA expects to assign the final credit rating within 120 days following the assignment date of the expected rating (August 30, 2018).
The expected credit rating was assigned based on the data provided by TRANSKAPITALBANK, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and TRANSKAPITALBANK participated in the rating process.
No material discrepancies between the provided information and the data officially disclosed by TRANSKAPITALBANK in its financial statements have been discovered.
ACRA provided no additional services to TRANSKAPITALBANK and SFE TKB SME 1 LLC. No conflicts of interest were identified in the course of the credit rating process.
ACRA is of the opinion that any investment decision based on this report shall be taken with due consideration for possible changes in the transaction characteristics and the credit rating.
This report is based on the data available to ACRA as of August 2018. In view of standard transactional dynamics, in the period from the rating date to the issue date of the rated securities, certain components of the transaction may be subject to changes.
In case of material discrepancies between the final documents and other transactional information and the information obtained at the stage of expected rating, the credit rating assigned by ACRA at the issue date may differ from the expected credit rating.
ACRA is of the opinion that any expected credit rating assigned and published subject to all relevant explanations and using 'e' prefix is a critically important tool to increase the transparency of issues and a key early warning advisory notice for investors. Correct use of expected credit ratings extends the timeframes for taking investment decisions and decreases the probability of unweighted investment decisions under stress conditions.