DBRS Confirms AA (low) Ratings on BBVA Covered Bonds Programme, Maintains UR-Positive

DBRS Ratings Limited (DBRS) has today confirmed its AA (low), Under Review with Positive Implications, ratings on the Cédulas Hipotecarias (CH, the Spanish mortgage covered bonds) issued by Banco Bilbao Vizcaya Argentaria S.A. (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”. BBVA is the Issuer and Reference Entity for the programme.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with BBVA CH.
-- An LSF-Implied Likelihood (LSF-L) of “A”. In DBRS’s view, BBVA CH’s LSF-L is limited to the CBAP.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 133% that DBRS gives credit to, being the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.85.

DBRS placed BBVA CH Under Review with Positive Implications on 9 February 2016. The Under Review status reflects both (1) the A (high) long-term Critical Obligations Rating (COR) assigned to BBVA S.A on 12 February 2016, and (2) the publication on 4 February 2016 of a Request for Comments for the “Rating European Covered Bonds” methodology that proposes a new analysis for the determination of the Covered Bonds Attachment Point (CBAP) for those Reference Entities (RE) that have been assigned a COR. The Under Review with Positive Implications status on the covered bonds will be resolved only once the Request for Comments for the “Rating European Covered Bonds” methodology is finalised and implemented.

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 one notch, resulting in a downgrade of the covered bonds rating by one notch. In addition, everything else being equal, the CH ratings 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 a two-notch uplift for high recovery prospects.

As at 31 December 2015, the total outstanding amount of CH is EUR 28.36 billion, while the aggregate balance of the mortgages in the cover pool is EUR 72.91 billion, resulting in a total OC of 157%. The eligible cover pool stands at EUR 38.16 billion, resulting in an eligible OC of 34.6%.

As of 30 September 2015, the cover pool amounts to EUR 74.58 billion split between 74.4% residential, 13.2% commercial and 12.4% developers. The cover pool comprises 804,823 mortgages with a weighted-average current unindexed loan-to-value ratio (WACLTV) of 77.7%. It is geographically distributed mainly in Catalonia (31%), Madrid (16%) and Andalusia (15%). The pool is 86 months seasoned and the reference rate of the underlying loans is primary floating (95%), all loans being originated in euros.

As customary in the Spanish market, the CH holders do not receive the benefit of any swap contract to hedge the mismatches between the interest yield by the cover pool (95.2% floating rate linked to different indexes and resets) and the interest due on the CH (88% paying fixed and 12% floating rate linked to different indexes and resets). The only foreign currency CH amounts to a nominal of NOK 1.1 billion, equivalent to roughly EUR 114.7 million at the spot rate as of 31 December 2015 (or 0.40% of the CH outstanding). This residual exposure is mitigated by the OC available.

The weighted-average life of the assets is roughly twelve 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 BBVA CH, please refer to the rating report that is 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 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 2015). This can be found at http://www.dbrs.com/about/methodologies. In DBRS’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, an asset analysis and an operational risk review were not conducted. 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/.

The sources of information used for these ratings include historical default cover pool 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 these ratings 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.

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 9 February 2016, when DBRS placed the ratings of BBVA CH Under Review with Positive 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: Vito Natale
Initial Rating Date: 20 February 2013
Initial Rating Committee Chair: Claire Mezzanotte

Lead Analyst: Covadonga Aybar
Back-up Analyst: Vito Natale
Rating Committee Chair: Quincy Tang

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
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Global Methodology for Rating Banks and Banking Organisations
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating CLOs and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
-- The Effect of Sovereign Risk on Securitisations in the Euro Area
-- Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings

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