DBRS Assigns Legal and Structuring Framework Assessment to Spanish Mortgage Covered Bonds Programmes

DBRS Ratings Limited (DBRS) has today assigned an “Average” Legal and Structuring Framework (LSF) Assessment to the nine Spanish CH (Cédulas Hipotecarias, the Spanish legislative mortgage covered bonds) it rates.

The LSF Assessment is one of the four pillars of DBRS’s Rating European Covered Bonds methodology (the Methodology) and expresses DBRS’s view on the likelihood that payment obligations under the Covered Bonds (CBs) could be smoothly and efficiently transferred from a troubled bank to another bank, or the Cover Pool (CP), administered by a third party. Notwithstanding each LSF assessment being programme-specific and reflecting the legal and structural features of each CB programme, DBRS notes all CH programmes it rates follow the same template and do not manifest any specific additional features.

DBRS has assigned LSF Assessments to the Spanish Cédulas Hipotecarias as follows:

• Abanca Corporación Bancaria: an LSF assessment of “Average”
• Banco de Sabadell: an LSF assessment of “Average”
• Banco Pastor: an LSF assessment of “Average”
• Banco Popular Español: an LSF assessment of “Average”
• Bankia: an LSF assessment of “Average”
• BBVA: an LSF assessment of “Average”
• Cajas Rurales Unidas: an LSF assessment of “Average”
• Caja Rural de Granada: an LSF assessment of “Average”
• Liberbank: an LSF assessment of “Average”

The “Average” LSF Assessment associated with each of the CH programmes reflect DBRS’s view of: (1) the CH legal framework providing for CH holders first priority right on the entire mortgage book of the issuer, in combination with a residual commingling risk that DBRS considers limited; (2) the absence of specific provisions and the uncertainty surrounding the timely liquidation of the CP to meet maturing CH in an assumed insolvency of the issuer as well as the lack of any short-term liquidity support, balanced by DBRS’s expectation of regulator’s willingness and ability to support the CB instrument in line with a Host Sovereign rated A (low) with Stable Trend; (iii) the role of the Bank of Spain in the supervision of the Spanish CH, which oversees the banking business and the CH business of the issuer as a sole entity, combined with the absence of contingency plans specific to the continuation of the CH, high penetration of the CH as a funding tool for Spanish banks and a history of regulatory intervention in the restructuring of financial institutions during the last years, which in DBRS’s view, benefit CH holders because of the structural nature of Spanish CH.

A potential downgrade of the sovereign rating of the Kingdom of Spain below A (low) may cause the LSF Assessment to be reduced to the “Modest” category.

DBRS acknowledges the request for comments on proposed amendments to the Spanish law issued by the Spanish Treasury and also understands the preliminary stage of the potential changes. A specific review of the LSF Assessments would take place once the legislation and any secondary regulation are clarified and enacted.

For further information on each CH programme, please refer to the ratings report that can be found on www.dbrs.com.

The principal methodology applicable to Spanish covered bonds is: “Rating European Covered Bonds” (December 2014). This can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com