DBRS Assigns AA Rating to Banco Sabadell S.A. Covered Bonds (Cédulas Hipotecarias - Mortgages) New Issuance

DBRS Ratings Limited (DBRS) has today assigned a rating of AA to Banco Sabadell’s newly issued Cédulas Hipotecarias (CH, Spanish mortgage covered bonds), CH I/2017 (ISIN ES0413860596) under its mortgage covered bond programme (the Programme). The new issuance is a EUR 1 billion fixed-rate note maturing in April 2027. Concurrently, DBRS has withdrawn the rating to CH I/2007 (ISIN ES0413860067), repaid on 24 January 2017, and has confirmed its AA ratings on all other DBRS-rated Cédulas Hipotecarias (CH, Spanish mortgage covered bonds) outstanding under the Programme.

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. DBRS considers CH as a systemically important financing tool in Spain.
-- 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 100% 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 was downgraded below BBB (low); (2) the sovereign rating of the Kingdom of Spain was downgraded below A (low); (3) the quality and consistency of the cover pool was no longer sufficient to support a two-notch uplift for high recovery prospects; (4) the relative amortisation of the CH and CP was to move adversely; or (5) volatility in the financial markets was to cause the currently estimated market value spreads to be increased.

The total outstanding amount of CH after the issuance is EUR 22.96 billion (of which DBRS rates 32 bonds with an outstanding balance of EUR 18.50 billion), while the aggregate balance of the mortgages in the cover pool is EUR 50.78 billion (as of 31 March 2017), resulting in a total OC of 121%. The eligible cover pool stands at EUR 35.33 billion, resulting in an eligible OC of 53.9%.

As of 31 December 2016, the cover pool comprised 474,519 mortgage loans with a 59% residential versus 41% non-residential split and a weighted-average current unindexed loan-to-value ratio of 57.2%. It is geographically diversified, with higher concentrations in the Catalonia (33.4%) and Community of Valencia (19.0%) regions. Approximately 0.3% of the pool assets were originated in a currency other than euros. The pool is 82 months seasoned.

The vast majority of the loans in the cover pool (approximately 82%) are floating rate, while 44% of the liabilities pay fixed coupon (as of today and including cédula I/2017). 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 approximately ten years, while that of the covered bonds is 3.8 years (as of today and including cédula I/2017). 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 latest available rating report 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 to the rating is “Rating European Covered Bonds”. This can be found at www.dbrs.com 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, DBRS focused on a cash flow analysis.

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.

In DBRS’s opinion, a discontinued-repaid rating action does not warrant the application of the entire principal methodology, as the bond has been repaid in full.

For a more detailed discussion of 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 these ratings include historical default performance data and stratification information on the cover pool provided by the issuer.

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 programme took place on 21 December 2016, when DBRS assigned an AA rating to Banco Sabadell CH IV/2016 (ISIN ES0413860570).

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: Antonio Laudani, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 3 September 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)
-- 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

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