DBRS Assigns AA Rating to Banco Sabadell S.A. Covered Bonds New Issuance

DBRS Ratings Limited (DBRS) has today assigned a rating of AA to a covered bond, Cédulas Hipotecarias II/2016 (ES0413860554), issued by Banco de Sabadell. The new issuance is a EUR 1 billion fixed-rate security maturing in October 2023. At the same time, DBRS has confirmed its AA ratings of the other outstanding Cédulas Hipotecarias (CH, Spanish mortgage covered bonds).

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A”, being the Long-Term Critical Obligations Rating of Banco Sabadell. Banco Sabadell is the Issuer and Reference Entity for the programme.
-- A legal and structuring framework (LSF) assessment of Average associated with Banco Sabadell CH.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (high). In DBRS’s view, the 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 124% to which DBRS gives credit, 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 ratings of the CH would be downgraded if any of the following were to occur: (1) the CPCA were downgraded below BBB (low); (2) the sovereign rating of the Kingdom of Spain were downgraded below A (low); (3) the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects; (4) the relative amortisation of the CH and CP were to move adversely; or (5) volatility in the financial markets were to cause the currently estimated market value spreads to be increased.

The total outstanding amount of CH after the issuance is EUR 21.71 billion, while the aggregate balance of the mortgages in the cover pool is EUR 53.46 billion (as of June 2016), resulting in a total OC of 146%. The eligible cover pool stands at EUR 36.29 billion, resulting in an eligible OC of 67%.

As of June 2016, the cover pool comprised 480,691 mortgage loans with a 57% residential versus 43% non-residential split and a weighted-average current unindexed loan-to-value ratio of 57.6%. It is geographically diversified, with higher concentrations in the Catalonia region (32.7%) and Community of Valencia (19.2%). Approximately 0.19% of the pool assets were originated in a currency other than euros. The pool is 80 months seasoned.

The vast majority of the loans in the cover pool (approximately 87%) are floating rate, while 44% of the liabilities pay fixed coupon. As is 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 ten years, while that of the covered bonds is 3.7 years (after the issuance). This generates an asset-liability mismatch that is partly mitigated by the available OC.

For further information on Banco Sabadell CH, please refer to the rating report available on www.dbrs.com.

DBRS has assessed the LSF related to Banco Sabadell 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” (July 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 legal documents was limited to the final terms of the new issuance. Other methodologies and criteria referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

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 this rating include historical default performance data and stratification information on the cover pool provided by the issuer that allowed DBRS to further assess the portfolio.

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 considers the information available to it for the purposes of providing this rating was 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.

The last rating action on this programme took place on 2 September 2016, when DBRS confirmed its AA ratings on Banco Sabadell CB following the completion of the full review of the programme.

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: 3 September 2013
Initial Rating Committee Chair: Erin Stafford, Managing Director

Lead Analyst: Covadonga Aybar, Vice President
Rating Committee Chair: Erin Stafford, Managing Director

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
-- European RMBS Insight Methodology
-- European RMBS Insight: Spanish Addendum
-- 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 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.