DBRS Confirms AA Ratings on BBVA Covered Bonds Programme

DBRS Ratings Limited (DBRS) has today confirmed its AA ratings on the Cédulas Hipotecarias (CH or the Spanish mortgage covered bonds) issued by Banco Bilbao Vizcaya Argentaria S.A. (BBVA or the Issuer). The confirmation follows the completion of a full review of the ratings.

DBRS has also discontinued the ratings on Cédula Hipotecaria 17 (ES0413211170) and Cédula Hipotecaria 19 (ES0413211345), both of which matured on 18 January 2017.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high), being the Long-Term Critical Obligations Rating of BBVA. BBVA is the Issuer and Reference Entity for the programme.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with BBVA CH.
-- An LSF-Implied Likelihood (LSF-L) of A (high). In DBRS’s view, BBVA CH’s LSF-L is limited to the CBAP.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 146% 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 and interest rate stresses to calculate liquidation values on the cover pool.

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 the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects.

As of today, the total outstanding amount of CH was EUR 24.57 billion (of which DBRS rates ten bonds publicly with an outstanding balance of EUR 9.82 billion) while the aggregate balance of the mortgages in the cover pool at 31 December 2016 was EUR 80.30 billion, resulting in a total OC of 227%. The eligible cover pool stands at EUR 44.72 billion, resulting in an eligible OC of 82.0%.

As of 30 December 2016, the cover pool amounts to EUR 80.30 billion split between 84.7% residential, 6.5% commercial and 8.8% developers. The cover pool comprises 953,695 mortgages with a weighted-average (WA) current unindexed loan-to-value ratio of 71.0%. It is geographically distributed mainly in Catalonia (38.5%), Madrid (15.0%) and Andalusia (13.3%). The pool is 97 months seasoned and the reference rate of the underlying loans is primary floating (94.4%). All loans are originated in euros.

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 (94.4% floating rate linked to different indexes and resets) and the interest due on the CH (78.2% paying fixed and 21.8% floating rate linked to different indexes and resets). The only foreign-currency CH amounts to a nominal of NOK 1.1 billion, equivalent to roughly EUR 121.5 million at the spot rate as of 31 December 2016 (or 0.49% of the CH outstanding). This residual exposure is mitigated by the OC available.

The WA life of the assets is roughly 12 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 BBVA CH, please refer to the rating report that is available on www.dbrs.com.

DBRS has applied the new Structured Credit methodology, published on 19 July 2016, to perform the analysis of the non-residential portion of the pool. For further information, please see “Rating CLOs Backed by Loans to European SMEs.”

DBRS has assessed the LSF related to BBVA 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 to the rating is: “Rating European Covered Bonds.” This can be found at http://www.dbrs.com/about/methodologies.

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 these ratings include historical default cover pool performance data and cover pool stratification tables provided by BBVA that allowed DBRS to further assess the portfolio.

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

DBRS did not rely upon third-party due diligence in order to conduct its analysis. At the time of initial rating, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this programme took place on 10 March 2016, when DBRS upgraded the ratings of BBVA CH to AA following an update of “Rating European Covered Bonds” methodology.

Information regarding DBRS ratings, including definitions, policies and methodologies is 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, Managing Director
Initial Rating Date: 20 February 2013

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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

A description of how DBRS methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.