The expected credit rating of the senior tranche to be issued in this dynamic securitization transaction backed by a portfolio of industrial vehicle and construction machinery loans has reached eA-(ru.sf) due to the credit support provided by two subordinated (junior) note tranches and the satisfactory credit quality of the collateral portfolio.
Within the framework of the planned securitization transaction, LLC “SFO BIB171” (“the Issuer”) will issue the notes secured by the portfolio of loans originated by “BaikalInvestBank” JSC
(B-(RU), outlook Stable) (hereinafter, BIB or the Bank).
The Issuer will issue three tranches of ruble denominated notes, two of which are fixed rate and one of which is floating. Proceeds from the issue will be used to acquire the portfolio of ruble denominated loans granted by the Bank to the borrowers purchasing industrial vehicles and construction machinery and/or secured by industrial vehicles, and construction machinery. Loan receivables acquired by the Issuer will form part of the security for the notes. The main source of payments on the rated notes will consist of repayments from the underlying loans.
The transaction is the first issue of asset-backed notes secured by a portfolio of loans granted by the Bank for the purchase of and/or secured by industrial vehicles and construction machinery, and also the Bank’s first structured finance transaction that received a credit rating. Credit Europe Bank Ltd. (BBB(RU), outlook Positive) (CEB) will act as the 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. CEB has substantial experience in the issuance and administration of car loans, as well as in servicing car loan portfolios in securitization transactions. The geographical coverage of the CEB’s branch network corresponds to the geographical distribution of assets in the portfolio, which increases the likelihood of uninterrupted administration of securitized loans.
The transaction is dynamic: new loans will be included into the securitized portfolio in replacement of repaid loans within two years of the notes issue date, subject to certain conditions.
The transaction is not based on the principles of self-certification or minimization of independent analysis in the STC securitization framework, and it does not provide for any state budget support and/or third-party guarantees.
The issuer is a bankruptcy remote special purpose vehicle operating in accordance with the requirements of Federal Law No. 379-FZ, dated December 21, 2013, “On Amending Certain Legislative Acts of the Russian Federation.” The sole business of the Issuer is the acquisition of loan receivables and issue of asset backed securities.
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 the distribution of probability of default (PD) across the loan portfolio: the expected PD for the initial and replenishment portfolios is equal to [34.6]% and [39.8]%, respectively, with the standard deviation of [10.2]%. 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 recoveries, prepayments, and other factors impacting cash flow distribution in the transaction.
The most significant factors that determined the portfolio expected losses forecasted by ACRA are:
The rated notes benefit from subordination, i.e. the priority of class A note payments is determined by their seniority to the Issuer’s obligations under class B and M notes. The aggregate volume of credit support to the rated class A notes formed by B and M tranches is 23% of the portfolio of assets. Additional credit support to the notes will be provided by the reserve fund which, on the note issue date, will be equal to [5.46]% of the rated notes’ notional. During the entire life of the transaction, the reserve fund will be one of the main sources of liquidity to cover potential short-term delinquencies in senior note interest payments and Issuer’s senior expenses. In certain situations, the reserve fund may also be a source of credit support for the notes, i.e. in some scenarios, the reserve fund forms part of the security collateral available to compensate principal losses. 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 (full principal and interest accrued).
According to the transaction’s priority of payments, the cash flows will be distributed via a simple sequential payment waterfall. In the replenishment period, the principal proceeds from the loans in the portfolio will be used to purchase new eligible assets. After the replenishment period, all portfolio proceeds including interest payments after the deduction of transaction expenses and the coupon due under class A notes will be applied to repay the senior tranche (turbo amortization). Other obligations of the Issuer will not be repaid until the rated notes are fully repaid. In ACRA's opinion, such an arrangement will allow for the timely payment of interest on the rated notes until their legal final maturity.
Model sensitivity analysis shows possible changes in the initial ACRA ratings assigned to the notes depending on changes in the underlying model assumptions. As alternative input parameters, ACRA used the stress values of expected probability of default, standard deviation and the portfolio recovery rates, reflecting significant deterioration in the macroeconomic conditions as compared to the base case scenario.
At the time the expected credit rating was assigned, the analysis using the GRASP model developed by ACRA indicated that, all else being equal, the notes would have achieved
eA-(ru.sf) even if the expected probability of default in the initial portfolio reached [35.58]%. Similarly, the eA-(ru.sf) rating will hold if, all else being equal, the standard deviation increases from [10.22]% to [10.72]%. The sensitivity analysis also showed that the maximum decline in the credit rating did not exceed three notches in the most stressful scenarios modelled.
A negative rating action may be prompted by developments that include the following:
The principal methodology used to assign the expected credit rating was 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 methodology and analytical approaches used by ACRA to assign the expected credit rating contain no assumptions applied by other market participants to rate obligations secured by assets of lower quality, including subprime mortgages and high-risk credit products.
The expected credit rating was assigned to the asset-backed notes issued by LLC “SFO BIB171” for the first time. ACRA will assign the final credit rating within 180 days following the assignment date of the expected rating (November 27, 2018).
The expected credit rating was assigned based on the data provided by “BaikalInvestBank" JSC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and “BaikalInvestBank" JSC participated in the rating process.
No material discrepancies between the provided information and the data officially disclosed by “BaikalInvestBank" JSC in its financial statements have been discovered.
ACRA provided no additional services to “BaikalInvestBank" JSC or LLC “SFO BIB171.” 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 June 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 making investment decisions and decreases the probability of unweighted investment decisions under stress conditions.
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