DBRS Assigns AA Rating to Banco Popular Español Cédulas Hipotecarias, Maintains UR-Developing

DBRS Ratings Limited (DBRS) has today assigned a rating of AA, Under Review with Developing Implications, to a new covered bond, Cédulas Hipotecarias – ES0413790421, issued by Banco Popular Español (BPE or the Issuer). The new issuance is a EUR 750 million fixed-rate security maturing in September 2021. At the same time, DBRS has confirmed the AA, 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). BPE is the Issuer and Reference Entity for the programme. DBRS is in the process of reviewing the CBAP for this Issuer and expects to conclude the review in the coming weeks.
-- A Legal and Structuring Framework (LSF) Assessment of Average assigned to BPE CH.
-- A Cover Pool Credit Assessment (CPCA) of “A” being the lowest CPCA in line with the covered bonds rating.
-- A LSF-Implied Likelihood (LSF-L) of A (high).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 136% 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 covered bonds were placed Under Review with Developing Implications due to the publication of DBRS’s “Rating European Covered Bonds” methodology and the review of the issuer rating. DBRS expects that the review of the covered bonds will be resolved in the coming weeks.

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 CBAP by one notch would lead to a downgrade of the LSF-L by two notches, resulting in a downgrade of the covered bonds rating by two notches.

In addition, everything else being equal, the BPE CH ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below “A”; (2) the sovereign rating of the Kingdom of Spain were downgraded below A (low); (3) the LSF assessment associated with the programme was downgraded; (4) the quality and consistency of the cover pool (CP) were no longer sufficient to support a two-notch uplift for high recovery prospects; or (5) volatility in the financial markets caused the currently estimated market value spreads to increase.

The total outstanding amount of CH is EUR 18.67 billion, while the aggregate balance of the mortgages in the cover pool is EUR 51.23 billion (as of August 2015), resulting in a total OC of 174%. The eligible cover pool stands at EUR 24.99 billion, resulting in an eligible OC of 33.8%.

As of June 2015, the cover pool comprises 309,666 mortgage loans with a weighted-average current unindexed loan-to-value ratio of 54%, with a 40% residential, 36% commercial, 16% land, 7% developers and 1% land loans split. It is geographically diversified, with higher concentrations in Madrid (26%), Andalusia (22%) and Catalonia (12%). The pool is 63 months seasoned.

The vast majority of the loans in the cover pool (approximately 88%) are floating rate, while 65% 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 nine years, while that of the covered bonds is roughly five years. This generates an asset-liability mismatch that is partly mitigated by the available OC.

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

DBRS has assessed the LSF related to BPE 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 Grupo Banco Popular 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 31 July 2015, when DBRS assigned ratings to BPE’s CH new issuance.

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: 24 April 2013
Initial Rating Committee Chair: Claire Mezzanotte

Lead Analyst: Covadonga Aybar
Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
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 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.

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.