DBRS Assigns AA (low) Rating to Banco Sabadell Cédulas Hipotecarias, Maintains UR-Developing

DBRS Ratings Limited (DBRS) has today assigned a rating of AA (low), Under Review with Developing Implications, to a new covered bond, Cédulas Hipotecarias – ES0413860497, issued by Banco de Sabadell. The new issuance is a EUR 1 billion floating-rate security maturing in September 2020. At the same time, DBRS has confirmed its AA (low), Under Review with Developing Implications, ratings of the other outstanding Cédulas Hipotecarias (CH, Spanish mortgage covered bonds).

The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) 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.
-- A two notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 142% 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 under review status on the covered bonds is a consequence of DBRS’s review of the implications of recent developments in European regulation and legislation regarding the Bank Recovery and Resolution Directive (BRRD). The under review status on the covered bonds will only be resolved once the conditions that led to the assignment of review are finalised.

DBRS published its updated “Rating European Covered Bonds Methodology” on 8 September 2014, which redefines its analysis for deriving the CBAP of all European Programmes that have a Reference Entity (RE) that is subject to the BRRD. The CBAP is currently tied to the issuer rating of the RE in Europe.

At the same time, DBRS published a press release announcing its intention to introduce a Preferred Obligations Rating for European banks that it rates. DBRS considers the reasoning behind the Preferred Obligations Rating is similar to the one underpinning the determination of the CBAP. To the extent that the Preferred Obligations are introduced, it is likely that they will provide the starting point for the CB.

Banco Sabadell’s RE rating, currently under review, incorporates a notching benefit from the sovereign support. DBRS expects that it will not be able to take conclusive rating actions before, at a minimum, the review of the issuer rating is concluded. Should the intention to introduce Preferred Obligation Ratings eventually materialise, this may further delay the conclusion of the review on the CB ratings.

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 market value spreads to calculate liquidation values on the cover pool.

Everything else being 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 being equal, the ratings of the CH would be downgraded if any of the following occurred: (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 a two-notch uplift for high recovery prospects or (4) volatility in the financial markets caused the currently estimated market value spreads to be increased.

The total outstanding amount of CH after issuance is EUR 21.83 billion, while the aggregate balance of the mortgages in the cover pool is EUR 58.21 billion (as of August 2015), resulting in a total OC of 167%. The eligible cover pool stands at EUR 38.18 billion, resulting in an eligible OC of 75%.

As of June 2015, the cover pool comprises 487,987 mortgage loans with a 53% residential versus 47% non-residential split and a weighted-average current unindexed loan-to-value ratio of 56%. It is geographically diversified, with higher concentrations in the Catalonia region (32%) and Community of Valencia (20%). The pool is 78 months seasoned.

The vast majority of the loans in the cover pool (approximately 95%) are floating rate, while 47% 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 the DBRS cash flow modelling. The weighted-average life of the assets is roughly ten years, while that of the covered bonds is 3.6 years. 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 CH 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” (September 2015). 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 “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary 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 provided by Banco Sabadell 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 3 September 2015, when DBRS confirmed ratings on Banco Sabadell CH and maintained them 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: Diana Turner

DBRS Ratings Limited
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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 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.