DBRS Assigns Rating to Banco Popular Español Cédulas Hipotecarias New Issuance, AA, UR-Positive

DBRS Ratings Limited (DBRS) has today assigned a rating to a new covered bond (ES0413790439) issued by Banco Popular Español S.A. (BPE or the Issuer). The new issuance, rated AA Under Review with Positive Implications, is a EUR 1.5 billion fixed-rate security maturing in March 2022. At the same time, DBRS has confirmed the AA, Under Review with Positive Implications ratings of the 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.
-- 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 137% 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 BPE CH Under Review with Positive Implications on 9 February 2016. The Under Review status reflects both (1) the “A” long-term Critical Obligations Rating (COR) assigned to BPE on 4 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 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 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 were downgraded; (4) the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects; or (5) volatility in the financial markets were to cause the currently estimated market value spreads to increase.

The total outstanding amount of CH is EUR 18.78 billion, while the aggregate balance of the mortgages in the cover pool is EUR 49.07 billion (as of January 2015), resulting in a total OC of 161%. The eligible cover pool stands at EUR 24.25 billion, resulting in an eligible OC of 29%.

As of December 2015, the cover pool comprises 300,002 mortgage loans with a weighted-average current unindexed loan-to-value ratio of 54%, with a 40% residential, 37% commercial, 15% 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 67 months seasoned.

The vast majority of the loans in the cover pool (approximately 88%) are floating rate, while 70% 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 (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/.

This rating is Under Review with Positive Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. 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.

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 BPE’s CH ratings 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: Covadonga Aybar
Initial Rating Date: 24 April 2013
Initial Rating Committee Chair: Claire Mezzanotte

Lead Analyst: Covadonga Aybar
Rating Committee Chair: Erin Stafford

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
-- 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 analyses structured finance transactions and how the methodologies are collectively applied can be found at http://www.dbrs.com/research/278375.