DBRS Confirms Ratings on BBVA Covered Bond Programme

DBRS Ratings Limited (DBRS) has today confirmed its AA (low) rating on the Cédulas Hipotecarias (CH or the Spanish mortgage covered bonds) issued by Banco Bilbao Vizcaya Argentaria (BBVA) Covered Bond Programme (BBVA or the Issuer). The confirmation follows the completion of a full review of the rating.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A” being the Issuer and Senior Debt Rating of BBVA. BBVA is the Issuer and Reference Entity for the programme.
-- A legal and structuring framework (LSF) assessment of Average associated to BBVA CH.
-- An LSF-implied likelihood (LSF-L) of “A.” In DBRS’s view, the CH’s LSF-L is limited by the CBAP.
-- Two notches uplift for high recovery prospects. DBRS has formed a view on the availability and sufficiency of the cover pool to satisfy the claims of the CH holders.
-- A level of overcollateralisation (OC) of 97% that DBRS gives credit to, being the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.85.

The transaction was modelled using the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and senior costs.

Everything else being equal, a downgrade of the Reference Entity rating by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch.

In addition everything else being equal, the ratings of the CH would be downgraded if any of the following occurred: (1) the sovereign rating of the Kingdom of Spain were downgraded below A (low) or (2) the quality and consistency of the cover pool were no longer sufficient to support two notches uplift for high recovery prospects.

As at 31 December 2014, the total outstanding amount of CH is EUR 29.96 billion, while the aggregate balance of the mortgages in the cover pool is EUR 79.83 billion, resulting in a total OC of 166% and an eligible OC of 35%.

As highlighted during the last annual review (please see “DBRS Confirms Ratings on BBVA Cédulas Hipotecarias”, published February 2014), since June 2013 BBVA has been adjusting the property valuation on the mortgage loans backing the CH and the properties’ value reviews keep on being refreshed on a regular basis. As a consequence, the weighted-average loan-to-value (WALTV) has gone from 68.6% to 78.6% on a yearly basis and the eligible cover pool represents 50% of the total pool as at December 2014 compared to 63% one year ago. At the same time, the outstanding volume of CH has decreased more than EUR 10.99 billion.

It is DBRS’s understanding that updated valuations provide a clearer view on the assets backing the cover pool, reduce the amount and increase the quality of the eligible cover pool and enhance investor protection in case of an issuer default because the total overcollateralisation has increased from 114% to 166% during the last year.

As of December 2014, the cover pool comprises 835,457 mortgage loans with a WALTV of 78.6%, with a 75% residential versus 25% non-residential split. It is geographically diverse with higher concentrations in the Catalonia region (31%), Madrid (16%) and Andalusia (15%). The pool is 81 months seasoned.

The vast majority of the loans in the cover pool (96%) are floating rate, while 87% of the liabilities pay fixed coupon. As is customary in Spanish CH, swaps are not for the benefit of the CH holders. The mismatch between the principal bullet payments of the CH and the amortisation profile of the assets is approximately nine years. All assets are denominated in euros whereas 0.4% of the CH are denominated in CHF. Given the volume of covered bonds denominated in other currencies, DBRS considers that investor exposure to foreign exchange risk is negligible.

For further information on BBVA CH, please refer to the ratings report available on www.dbrs.com.

DBRS has assessed the LSF related to BBVA CH as Average according to its rating methodology. For more information, please refer to the DBRS commentaries “Spanish Mortgage Covered Bonds: Legal and Structuring Framework Review” and “DBRS Assigns Legal and Structuring Framework Assessment to Spanish Mortgage Covered Bonds Programmes”, both available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is: “Rating European Covered Bonds” (December 2014). This can be found at http://www.dbrs.com/about/methodologies. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS’s commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include historical default performance data and cover pool stratification tables provided by BBVA that allowed DBRS to further assess the portfolio. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating action on this programme took place on 17 December 2014, when DBRS upgraded the ratings on BBVA CH following the implementation of DBRS’s “Rating European Covered Bonds” methodology.

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

For further information on DBRS historic default rates published by the European Securities and Markets Administration in a central repository, see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Vito Natale
Initial Rating Date: 20 February 2013
Initial Rating Committee Chair: Claire Mezzanotte

Lead Analyst: Covadonga Aybar
Rating Committee Chair: Diana Turner

DBRS Ratings Limited
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United Kingdom

Registered in England and Wales: No. 7139960

The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Rating European Covered Bonds
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model for European Securitisations