DBRS Assigns Provisional Ratings to SRF 2016-1 Fondo de Titulizacion

DBRS Ratings Limited (DBRS) has today assigned provisional ratings of AAA (sf) to the Class A Notes, A (sf) to the Class B Notes and BBB (sf) to the Class C Notes (Rated Notes) issued by SRF 2016-1 Fondo de Titulizacion (Issuer or Fund). The Class D Notes are unrated. The rating on the Class A Notes addresses timely payment of interest and ultimate payment of principal. The ratings on the Class B and Class C Notes address ultimate payment of interest and ultimate payment of principal. Credit enhancement is provided in the form of subordination. The transaction also benefits from an amortising Reserve Fund which provides liquidity support to the Rated Notes and provides principal support at maturity of Rated Notes. The initial size of the reserve fund is equal to 6% of the initial size of the Class A to D Notes. The reserve fund can amortise down to 7% of the outstanding balance of the Class A to D Notes, subject to a floor of 4% of the initial Class A to D Note Balance.

Proceeds from the issuance of the Class A to D Notes will be used to purchase Spanish residential mortgage loans. The mortgage loans were originated by Catalunya Banc, S.A. (CX), Caixa d’Estalvis de Catalunya, Caixa d’Estalvis de Tarragona and Caixa d’Estalvis de Manresa. The latter three entities were merged into Caixa d’Estalvis de Catalunya, Tarragona i Manresa which was subsequently transferred to Catalunya Banc, S.A. by virtue of a spin-off on 27 September 2011. During 2011 and 2012 CX received capital investment from the Fund for Orderly Bank Restructuring (FROB), effectively nationalising the bank.

As part of its divestment in CX, the FROB sold a portfolio of loans which were transferred to a securitisation fund, FTA 2015, Fondo de Titulizacion de Activos (2015 Fund) via the issuance of mortgage participation and mortgage transfer certificates, which represent the legal and economic interest in the mortgage loans. Following the sale of the mortgage loans in 2015, Banco Bilbao Vizcaya Argentaria S.A. (BBVA) acquired CX on 24 April 2015. Subsequently CX was absorbed and merged with BBVA. BBVA will act as Collection Account Bank and Master Servicer with servicing operations delegated to Anticipa Real Estate, S.L.U. (Anticipa or Servicer) in its role as Servicer.

The 2015 Fund will sell the mortgage loans to SRF Intermediate S.A.R.L. (Seller), who will subsequently sell and transfer the mortgage certificates and participations to the Issuer. The seller is a private limited company incorporated under the laws of Luxembourg and is a wholly owned subsidiary of the retention holder, Spain Residential Finance S.A.R.L. The retention holder will subscribe to the Class D Notes and guarantee the obligation of the Seller to repurchase ineligible mortgage certificates resulting from a breach of representation and warranties. Titulizacion de Activos, S.G.F.T., S.A. (TDA) has been appointed as the Management Company and back-up servicer facilitator.

The current balance of the provisional portfolio (as of 21 September 2016) is equal to EUR 265,638,872. The Weighted-Average Current Loan-to-Value (WACLTV) of the mortgage portfolio is 55.27%, with the Indexed WACLTV calculated by DBRS at 77.5%, (INE, TINSA Q4 2015). The seasoning of the portfolio is 9.1 years, with the origination vintages concentrated in 2006 to 2009 (61.17%).

The portfolio is largely concentrated in the autonomous region of Catalonia (74.7%). CX as originator was headquartered in Barcelona and focused its lending strategy in Catalonia. The concentration in a particular region leaves the transaction exposed to house price fluctuations, economic performance and changes in regional laws. Although the peak-to-trough house price decline observed in Catalonia was higher than the national average at 46.63%, prices have recovered 13.3% (Q2 2016). GDP and unemployment have also shown improvement, with estimated GDP figures for 2015 demonstrating an increase of 3.9% compared to a growth rate of 1.4% at the end of 2014. Unemployment has fallen to 15.9% as of Q2 2016 from 24.5% in Q1 2013.

63.8% of the pool consists of multi-credit loans which permit the borrower to make additional drawdowns. The borrower may not draw down in excess of the amounts stated in the mortgage agreement. Borrower eligibility for additional drawdowns is subject to key conditions. Generally a borrower must not be in default with restrictions also placed on the debt-to-income ratios. Once eligibility has been established, drawdown is subject to additional criteria such as caps on the maximum drawdown amounts, maturity restrictions and LTV caps. Further drawdowns under the multi-credit agreement will be funded by the 2015 Fund. The various drawdowns amongst the multi-credit rank pari passu. Upon enforcement of a property securing multi-credit loans the proceeds applied would first repay the fund for any expenses incurred, with the remainder distributed between the Issuer and the 2015 Fund on a pro rata basis.

The majority of the pool (74.96%) consists of loans which have been restructured or benefitted from a grace period in the past. DBRS has assessed the historical performance of the mortgage loans and factored restructuring arrangements into its default analysis. As of August 2016, no borrowers have gone into arrears of more than 30 days for the preceding 37 months. As of the cut-off date, 0% of the pool is more than 30 days in arrears.

The transaction is exposed to unhedged basis risk with the assets linked to 12-month Euribor (80.62%), Mibor (0.57%) and IRPH (18.55%). The remaining portion (0.26%) pays a fixed rate of interest. The notes are linked to 3-month Euribor. The weighted interest rate of the portfolio is calculated at 1.42% with the weighted-average margin equal to 1.12%. 56.91% of the mortgage portfolio is eligible to receive reductions on the margin dependent on the additional products a borrower has with BBVA. The margin can potentially reduce to 1.03% after reduction.

13.81% of the pool was subject to interest rate floors in the past. As of 1 July 2016, interest rate floors were no longer applied. An Interest Rate Floor Clause (IRFC) reserve fund will be established to mitigate the potential risk of remediation payments to the borrowers as a consequence of the ruling by Spanish courts declaring floor clauses abusive. The IRFC reserve will be funded by the 2015 Fund for potential remediation of amounts accrued between 31 March 2014 and 1 July 2016. Amounts payable by the 2015 Fund are guaranteed by the Retention Holder via the retention holder guarantee. Spain Residential Finance S.a.r.l. provides a guarantee on the obligation of the seller to pay the repurchase price of an ineligible mortgage certificate and the obligation to compensate the fund in respect of compensation payments due to the issuer, by the 2015 Fund, with respect to interest rate floors.

BBVA is in place as the Master Servicer and Collection Account Bank. Anticipa, as the servicer of the mortgage loans, will act in the name of BBVA on behalf of the fund. BBVA will deposit amounts received which arise from the mortgage loans with the Issuer Account Bank within two business days. The servicer is able to renegotiate terms of the loans with borrowers subject to certain conditions being met. Permitted variations are limited to 5% of the initial pool balance and are limited to margin reduction and maturity extension.

BNP Paribas Securities Services, Spanish Branch (BNP) is the Issuer Account Bank and Paying Agent for the transaction. DBRS privately rates BNP with a Stable trend. DBRS has concluded that BNP meets DBRS’s minimum criteria to act in such capacity. The transaction contains downgrade provisions relating to the account bank where, if downgraded below ‘A’, the Issuer will replace the account bank or find a guarantor with the minimum DBRS rating of ‘A’ who will guarantee unconditionally and irrevocably the obligations of the treasury account agreement. The downgrade provision is consistent with DBRS’s criteria for the initial rating of AAA (sf) assigned to the Class A Notes.

The interest received on the Issuer Account Bank is equal to EONIA minus ten basis points (bps) if EONIA is less than or equal to 0% and EONIA minus 20bps if EONIA is positive. As it is possible for negative interest rates to accrue, there is a risk the Issuer will have to pay BNP for depositing cash. To account for potential negative interest rates, DBRS stressed the cash flows in the down interest rate scenario.

The ratings are based upon a review by DBRS of the following analytical considerations:

-- Transaction capital structure, proposed ratings and form and sufficiency of available credit enhancement. Credit enhancement to the Class A Notes (31.00%) is provided by subordination of the Class B (7.00%), Class C (4.00%) and Class D Notes (20.00%). Credit Enhancement to the Class B Notes (24.00%) is provided by subordination of the Class C (4.00%) and Class D Notes (20.00%). Credit Enhancement to the Class C Notes (4.00%) is provided by the Class D Notes.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated probability of default, loss given default and expected loss outputs on the mortgage loan portfolio.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B and Class C Notes according to the terms of the transaction documents. The transaction cash flows were modelled using portfolio default rates and loss given default outputs provided by the European RMBS Insight Model. The portfolio was assigned a Spanish Underwriting Score of 6. The calculated weighted-average life (WAL) of the portfolio assuming a 2% CPR is 7.6 years. Transaction cash flows were modelled using Intex Deal Maker.
-- The sovereign rating of the Kingdom of Spain rated A (low) / Stable and R-1 (low) / Stable (as of the date of this report)
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with DBRS’s Legal Criteria for European Structured Finance Transactions methodology.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodologies applicable to assign ratings to the above referenced transaction are “European RMBS Insight Methodology” and “European RMBS Insight: Spanish Addendum” (17 May 2016).

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include Anticipa and its representatives.

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 provisional rating analysis. DBRS will be provided with an AuP report before assignment of final ratings.

DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

In respect of the Class A Notes a Probability of Default Rate (PDR) of 48.66% and Loss Given Default (LGD) Rate of 45.78%, corresponding to a AAA (sf) rating scenario, were stressed assuming a 25% and 50% increase to the PD and LGD:

-- A hypothetical increase of the base case PDR by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the base case PDR by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (low) (sf).

In respect of the Class B Notes a Probability of Default Rate (PDR) of 39.72% and Loss Given Default (LGD) Rate of 39.24%, corresponding to a A (sf) rating scenario, were stressed assuming a 25% and 50% increase to the PD and LGD:

-- A hypothetical increase of the base case PDR by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (high) (sf).
-- A hypothetical increase of the base case PDR by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (low) (sf).

In respect of the Class C Notes a Probability of Default Rate (PDR) of 32.93% and Loss Given Default (LGD) Rate of 35.80%, corresponding to a BBB (sf) rating scenario, were stressed assuming a 25% and 50% increase to the PD and LGD:

-- A hypothetical increase of the base case PDR by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (high) (sf).
-- A hypothetical increase of the base case PDR by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to B (sf).

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) 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: Asim Zaman, Assistant Vice President
Initial Rating Date: 3 October 2016
Initial Rating Committee Chair: Erin Stafford, Managing Director
Lead Surveillance Analyst: Andrew Lynch, Senior Financial Analyst

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

-- Legal Criteria for European Structured Finance Transactions (14 September 2016)
-- Unified Interest Rate Model Methodology for European Securitisations (12 October 2015)
-- Operational Risk Assessment for European Structured Finance Servicers (31 December 2015)
-- Operational Risk Assessment for European Structured Finance Originators (15 December 2015)

A description of how DBRS analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375