DBRS Assigns AA (low) Rating to Banco Sabadell Cédulas Hipotecarias’s New Issuance

DBRS Ratings Limited (DBRS) has today assigned a rating of AA (low), Under Review with Developing Implications, to a new covered bond, Cédulas Hipotecarias - ES0413860455, issued by Banco de Sabadell. The new issuance is a EUR 750 million fixed-rate security maturing in June 2020. At the same time, DBRS has maintained the AA (low), Under Review with Developing Implications, ratings of the other outstanding Cédulas Hipotecarias (CH, Spanish mortgage covered bonds).

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point of A (low), Under Review with Negative Implications, being the Senior Unsecured Long-Term Debt and Deposit Rating of Banco Sabadell. Banco Sabadell is the Issuer and Reference Entity for the programme.
-- A legal and structuring framework (LSF) assessment of Average assigned to Banco Sabadell CH.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest CPCA in line with the covered bonds rating.
-- A LSF-implied likelihood (LSF-L) of “A.” In DBRS’s view, the CH’s LSF-L is limited to one notch above the CBAP.
-- Two notches uplift for high recovery prospects.
-- A level of overcollateralization (OC) of 145% that DBRS gives credit to, being the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.85x.

The review on the covered bonds will be resolved only once the conditions that lead to the assignment of review on the Issuer Rating are resolved and the Request For Comments for the “Rating European Covered Bonds” methodology is finalised.

The transaction was modelled with 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 market value spreads to calculate liquidation values on the cover pool.

Everything else equal, a downgrade of the Issuer 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 equal, the ratings of the CH would be downgraded if any of the following occurs: (1) the CPCA were downgraded below BBB (low), (2) the sovereign rating of the Kingdom of Spain were downgraded below A (low), (3) the quality and consistency of the cover pool were no longer sufficient to support two notches uplift for high recovery prospects or (4) volatility in the financial markets caused the currently estimated market value spreads to be increased.

Following the issuance, the total outstanding amount of CH is EUR 21.43 billion, while the aggregate balance of the mortgages in the cover pool is EUR 58.912 billion (as of April 2015), resulting in a total OC of 175%.

As of March 2015, the cover pool comprises 501,679 mortgage loans with a weighted-average current unindexed loan-to-value ratio of 57%, with a 53% residential / 47% non-residential split. It is geographically diverse, with the higher concentrations in the Catalonia region (32% of the cover pool) and Community of Valencia (20%). The pool is 76 months seasoned.

The vast majority of the loans in the cover pool (approximately 95%) are floating rate, while 55% of the liabilities pay fixed coupon. As customary in Spanish CH, swaps are not for the benefit of the CH holders. This has been accounted for in DBRS cash flow modelling. The weighted-average life of the assets was roughly 10.4 years, while that of the CH is roughly three years after the issuance. This generates an asset-liability mismatch that is partly mitigated by the available OC.

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

DBRS has assessed the LSF related to Banco Sabadell as Average according to its rating methodology. For more information, please refer to the DBRS Commentary “Spanish Mortgage Covered Bonds: Legal and Structuring Framework Review” and “DBRS Assigns Legal and Structuring Framework Assessment to Spanish Mortgage Covered Bonds Programmes,” 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 commentary The Effect of Sovereign Risk on Securitisations in the Euro Area at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

The sources of information used for this rating include historical default performance data and cover pool stratification tables 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 rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

The last rating action on this programme took place on 26 May 2015, when DBRS placed Banco Sabadell Covered Bonds ratings Under Review with Developing Implications.

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: Covadonga Aybar
Initial Rating Date: 3 September 2013
Initial Rating Committee Chair: Erin Stafford

Lead Analyst: Covadonga Aybar
Rating Committee Chair: Erin Stafford

DBRS Ratings Limited
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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 & 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 Small and Medium-Sized European Enterprises (SMEs)
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model Methodology for European Securitisations

A description of how DBRS methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375