DBRS Downgrades Banco Popular Español Cédulas Hipotecarias to AA

DBRS Ratings Limited (DBRS) has today downgraded to AA from AA (high) the ratings of the Cédulas Hipotecarias (CH, i.e. the Spanish mortgage Covered Bonds) rated by DBRS which are outstanding under the Banco Popular Español S.A. Covered Bonds (Cédulas Hipotecarias - Mortgages) programme (BPE CH, or the Programme).

There are currently 29 series of CH with a nominal amount of EUR 18.13 billion outstanding under the Programme. Out of those, DBRS currently rates 22 series, with an aggregate notional amount of EUR 14.83 billion.

This rating action follows the downgrade of the Issuer’s ratings, and in particular its Senior Unsecured Long-Term rating to BBB from BBB (high), and its Long-Term Critical Obligations Rating (COR) to A (low) from “A”, which occurred on 10 February 2017.

The ratings reflect the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of A (low), being the Long-Term Critical Obligations Rating of Banco Popular Español (BPE). BPE is the Issuer and Reference Entity for the programme. DBRS classifies Spain as a jurisdiction in which covered bonds are a particularly important funding instrument, and deems the cover pool strategic for the core activity of the Issuer.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with BPE CH.
-- A Cover Pool Credit Assessment (CPCA) of “A”, being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (high).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 136% 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 (CP).

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by two notches, resulting in a downgrade of the covered bonds rating by two notches.

In addition, everything else being equal, the BPE CH ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below “A”; (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 CP 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 were to cause the currently estimated market value spreads to increase.

The total outstanding amount of CH is currently EUR 18.13 billion, while the aggregate balance of the mortgages (as of 30 September 2016) in the CP is EUR 47.81 billion, resulting in a total OC of 164%. The eligible CP stands at EUR 23.28 billion, resulting in an eligible OC of 28%.

As of September 2016, the cover pool comprised 299,026 mortgage loans with a weighted-average current unindexed loan-to-value ratio of 54%, with a 41% residential, 37% commercial, 14% land, 7% developers and 1% other loans split. It is geographically diversified, with higher concentrations in Madrid (26%), Andalusia (22%) and Catalonia (12%). The pool is 71 months seasoned.

The vast majority of the loans in the cover pool (approximately 88%) are floating rate, while 62% of the liabilities pay fixed coupon.
As 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 about nine years, while that of the covered bonds is about five years. This generates an asset-liability mismatch that is partly mitigated by the available OC.

All liabilities are denominated in euros while 2.10% of the pool assets were originated in a different currency: this residual exposure is mitigated by the OC available and accounted for in the Pass-OC.

DBRS has assessed the LSF related to BPE 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.

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

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating European Covered Bonds”.

In DBRS’s opinion, the change under consideration does not require the application of the entire principal methodology. Therefore, DBRS focused on a cash flow analysis.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 data and information used for this rating include historical default performance data and stratification tables on the cover pool provided by the Issuer.

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 the initial rating, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

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

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 transaction took place on 27 October 2016, when DBRS assigned a rating of AA (high) to a new series of CH (2016-2, ISIN ES0413790454).

The lead analyst responsibilities for the Programme have been transferred to Antonio Laudani.

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: Antonio Laudani, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 24 April 2013

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The rating methodologies 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 Methodology: 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 Small and Medium-Sized Enterprises (SMEs)
-- The Effect of Sovereign Risk on Securitisations in the Euro Area

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