DBRS Confirms Ratings on Abanca Cédulas Hipotecarias at A (high)

DBRS Ratings Limited (DBRS) has today confirmed the A (high) ratings assigned to certain Cédulas Hipotecarias (CH or the Spanish mortgage covered bonds) issued by Abanca Corporación Bancaria (Abanca). 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 BBB. Abanca is the Issuer and Reference Entity for the programme. Abanca was not assigned a Critical Obligations Rating. DBRS considers CH to be systemic funding instruments in Spain; therefore, the CBAP is set at one notch above the Issuer Senior Debt and Deposit rating.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with Abanca CH.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest CPCA in line with the covered bonds rating.
-- A LSF-Implied Likelihood (LSF-L) of A (low).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 239% to which DBRS gives credit, being the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.90.

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 (CP).

Everything else being equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the covered bonds rating. 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 (low), (2) the sovereign rating of the Kingdom of Spain were downgraded below A (low), (3) the LSF assessment associated with the programme was downgraded, (4) the quality and consistency of the CP were no longer sufficient to support 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 4.12 billion (of which DBRS rates three bonds with an outstanding balance of EUR 1.15 billion) while the aggregate balance of the mortgages in the CP is EUR 15.58 billion (as of September 2016), resulting in a total OC of 278%. The eligible CP stands at EUR 9.85 billion, resulting in an eligible OC of 139%.

As of 30 September 2016, the CP amounts to EUR 15.58 billion split into 77.8% residential, 14.5% commercial, 3.0% developers, 0.5% land and 4.2% (by outstanding amount) other type of loans. The CP comprises 186,459 mortgages with a weighted-average current unindexed loan-to-value ratio of 61.8%. 51.5% of the CP is geographically concentrated in Galicia, Abanca’s home region. 4.1% of the CP assets are located outside Spain. The pool is 89 months seasoned on average.

As is 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 CP (94% floating rate linked to different indexes and resets) and the interest due on the CH (89% paying fixed and 11% paying floating rate linked to different indexes and resets). All liabilities are denominated in euros while 1.4% of the loans were originated in a different currency. These are mainly loans that were originated in Abanca’s Swiss branch. This residual exposure is mitigated by the OC available and accounted for in the Pass-OC.

The WA life of the assets is roughly 11 years considering a 0% prepayment rate while that of the covered bonds is four years. This generates an asset-liability mismatch that is partly mitigated by the available OC.

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

DBRS has assessed the LSF related to Abanca 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 2016). This can be found at http://www.dbrs.com/about/methodologies. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology. A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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 cover pool stratification tables provided by Abanca 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 December 2015, when DBRS confirmed the ratings on Abanca CH following completion of the annual deal review.

The lead responsibilities for this transaction have been transferred to Alessandra Maggiora.

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

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.

Lead Analyst: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Senior Vice President
Initial Rating Date: 10 December 2014

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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
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- 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
-- Unified Interest Rate Model Methodology for European Securitisations
-- 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.