Fitch Ratings has downgraded the ratings assigned to series A notes issued by Fideicomiso Mercantil Titularizacion Hipotecaria de Banco Pichincha 5 (FIMEPCH 5) to 'CCC+sf' from 'B-sf'.

The downgrade on the notes follows Fitch's downgrade of Banco Pichincha C.A. y Subsidiarias' (Banco Pichincha) on Aug. 24, 2023. For more details, see 'Fitch Takes Actions on Five Ecuadorian Banks Following Sovereign Downgrade' at www.fitchratings.com. The series A notes are capped at the rating of the Transaction Account Bank provider Banco Pichincha and Ecuador's Country Ceiling.

RATING ACTIONS

Entity / Debt

Rating

Prior

Fideicomiso Mercantil Titularizacion Hipotecaria de Banco Pichincha 5

A2

LT

CCC+sf

Downgrade

B-sf

A3

LT

CCC+sf

Downgrade

B-sf

A4

LT

CCC+sf

Downgrade

B-sf

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VIEW ADDITIONAL RATING DETAILS

KEY RATING DRIVERS

Downgrade of Transaction Account Bank Provider: The series A notes are capped at the rating of the Transaction Account Bank provider (currently Banco Pichincha). To be able to be rated at 'Bsf' rating category the Transaction Account Bank must have at least the same rating as the notes, according to Fitch's Structured Finance and Covered Bonds Rating Criteria.

However, in this case, the eligible bank has been defined as an entity with a rating equal to or maximum one notch below Ecuador's sovereign rating (CCC+), which constrains the ratings. As Banco Pichincha rating was downgraded to 'CCC+' from 'B-' on Aug. 24, 2023, the transaction's rating is also downgraded to that same level.

Stable Pool Characteristics: The portfolio has finished the replenishment phase and has been static since January 2022. Pool characteristics remained similar since issuance, while the portfolio has performed better than Fitch's initial expectations. As of July 2023, the average original loan-to-value (OLTV) was 67%, the assets original term averaging 18 years and the remaining term averaging 13 years, being consistent to its characteristics since its issuance, two years ago. As of July 23, just 14 loans (0.3%) reached 180 dpd and only five loans (0.13%) have been restructured.

Adequate Capital Structure Supports Ratings: The series A notes benefit from a sequential pay structure, where their target amortization payments are senior to interest and principal payments on the series B notes. Series A also benefits from credit enhancement (CE) of 14.2% as of July 2023 and an interest reserve account equivalent to 3x their next interest payment. In addition, although they benefit from excess spread, due to their Net weigted average coupon feature, Fitch does not consider this variable.

Operational Risk Mitigated: Pursuant to the servicer agreement, Banco Pichincha will perform the role of primary servicer. Fitch has reviewed Banco Pichincha's systems and procedures and is satisfied with its servicing capabilities. Additionally, Corporacion de Desarrollo de Mercado Secundario de Hipotecas CTH S.A. (CTH) has been designated as master and back-up servicer, mitigating the exposure to operational risk.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

The ratings are sensitive to the Ecuadorian sovereign's credit quality, as well as Banco Pichincha's (acting as the transaction account bank holder) credit quality. A downgrade of Ecuador's Country Ceiling to levels below the transaction current rating or a downgrade of Banco Pichincha would result in a downgrade of the series A notes.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The ratings assigned to the class A notes issued by FIMEPCH 5 are sensitive to the credit quality of the Ecuadorian sovereign, as well as to the credit quality of Banco Pichincha (acting as the transaction account bank holder). An upgrade of Banco Pichincha, or the replacement by another entity with a higher rating, could result in an upgrade of the series A notes.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

DATA ADEQUACY

The principal sources of information used in the analysis are described in the Applicable Criteria.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The credit quality of the Series A notes is currently capped at and driven by the rating of the Transaction Account Bank, Banco Pichincha, as measured by its Long-Term IDR.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Additional information is available on www.fitchratings.com

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