DBRS Upgrades to AA (high) Ratings on CaixaBank Cédulas Hipotecarias, Removes UR-Positive

DBRS Ratings Limited (DBRS) has today upgraded to AA (high) from AA (low) its ratings on the Cédulas Hipotecarias (CH, the Spanish mortgage covered bonds) issued by CaixaBank S.A. (CaixaBank or the Issuer) and has removed the ratings from Under Review with Positive Implications status.

The rating actions reflect a material update to the methodology DBRS uses to rate and monitor European covered bonds. The Methodology supersedes the previous “Rating European Covered Bonds” methodology published on 15 December 2015.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high), being the Long-Term Critical Obligation Rating of Caixabank. CaixaBank is the Issuer and Reference Entity for the programme.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with CaixaBank CH.
-- A Cover Pool Credit Assessment (CPCA) of BBB, being the lowest CPCA in line with the covered bonds rating.
-- A LSF-Implied Likelihood (LSF-L) of AA (low). In DBRS’s view, CaixaBank 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 121% 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 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 CPCA were downgraded below BBB, (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; (5) the relative amortisation profile of the CH and CP moved adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

The total outstanding amount of CH is EUR 47.7 billion, while the aggregate balance of the mortgages in the cover pool is EUR 121.9 billion (as of December 2015), resulting in a total OC of 155%. The eligible cover pool stands at EUR 64.3 billion, resulting in an eligible OC of 35%.

As of 31 December 2015, the cover pool amounts to EUR 121.9 billion split between 77.6% residential, 14.7% commercial, 6.6% developers and 1.1% land. The cover pool comprises 1,431,020 mortgages with a weighted-average current unindexed loan-to-value ratio (WACLTV) of 52.6%. It is geographically distributed mainly in Catalonia (26%), Andalusia (17%) and the Madrid region (15%), while 0.9% of the cover pool assets are located outside Spain. The pool is 95 months seasoned.

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 (98.6% floating rate linked to different indexes and resets) and the interest due on the CH (53.3% paying fixed rate and 46.7% floating rate linked to different indexes and resets). The only foreign currency CH amounts to a nominal of USD 255 million, equivalent to roughly EUR 234.2 million at the spot rate as of 31 December 2015 (or 0.49% of the CH outstanding). 0.89% of the loans were originated in a currency other than euros. This residual exposure is mitigated by the OC available and accounted for in DBRS modelling.

The weighted-average life of the assets is roughly eleven years, while that of the covered bonds is roughly six years. This generates an asset-liability mismatch that is partly mitigated by the available OC.

For further information on CaixaBank CH, please refer to the rating report that is available on www.dbrs.com.

DBRS has assessed the LSF related to CaixaBank CH as Average according to its rating methodology. For more information, please refer to DBRS’s “Spanish Mortgage Covered Bonds: Legal and Structuring Framework Review” and “DBRS Assigns Legal and Structuring Framework Assessment to Spanish Mortgage Covered Bonds Programmes” commentaries, available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating European Covered Bonds” (March 2016). 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. A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action. 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 performance data and cover pool stratification tables provided by CaixaBank 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 actions on this programme took place on 9 February 2016, when DBRS placed Caixabank’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: 20 January 2016
Initial Rating Committee Chair: Quincy Tang

Lead Analyst: Covadonga Aybar
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)
-- Critical Obligations Rating Criteria
-- 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.