DBRS Assigns A (high) Rating to Liberbank Cédulas Hipotecarias New Issuance

DBRS Ratings Limited (DBRS) has today assigned a rating of A (high) to a new series of Cédulas Hipotecarias (CH; i.e., the Spanish mortgage Covered Bonds), CH ES0468675014, issued by Liberbank S.A. (Liberbank or the Issuer) under the Liberbank S.A. Covered Bonds (Cédulas Hipotecarias - Mortgages) programme (Liberbank CH or the Programme). The new issuance is a EUR 2 billion floating-rate security, linked to three-month Euribor plus 0.35% and maturing in July 2024.

Concurrently, DBRS has confirmed its A (high) rating on the other DBRS-rated CH outstanding under the Programme.

Following this issuance, there are ten series of CH outstanding under the Programme, with a nominal amount of EUR 4.15 billion. Out of those, DBRS currently rates two series, with an aggregate notional amount of EUR 3 billion.

The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB. Liberbank is the Issuer and Reference Entity for the programme. There is no Critical Obligations Rating associated with Liberbank, but DBRS considers Spain as a jurisdiction for which covered bonds are a particularly important financing tool. As such, the CBAP is set at the level of the Issuer Rating plus one notch.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with Liberbank CH.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low) being the lowest CPCA in line with the LSF-Implied Likelihood.
-- An LSF-Implied Likelihood (LSF-L) of A (low).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 121% 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 were downgraded; (4) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (5) the relative amortisation profile of the CH and of the cover pool were to move adversely, or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

The total outstanding amount of CH is currently EUR 4.15 billion, while the aggregate balance of the mortgages (as of 30 June 2017) in the CP is EUR 9.75 billion, resulting in a total OC of 135%. The eligible CP stands at EUR 8.46 billion, resulting in an eligible OC of 104%.

As of June 2017, the cover pool comprised 146,589 mortgage loans with a weighted-average current unindexed loan-to-value ratio of 49%, split between 86% residential and 14% non-residential mortgages. It is geographically distributed mainly in Asturias (24.8%), Cantabria (25.0%) and Extremadura (17.0%). The pool is 8.3 years seasoned.

The vast majority of the loans in the CP (approximately 91.9%) are floating rate, while 25.4% of the liabilities pay fixed coupon.

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 cover pool and the interest due on the CH. This has been accounted for in the DBRS cash flow modelling. The interest rate risk is partially covered by the high level of OC available.

The weighted-average life of the assets is about 9.8 years, while that of the covered bonds is about 4.5 years. This generates an asset-liability mismatch that is partly mitigated by the available OC.

All liabilities are denominated in euros, as are all cover pool assets: as such, investors are not currently exposed to any foreign exchange risk.

DBRS has assessed the LSF related to Liberbank CH as Average according to its rating methodology. For more information, please refer to the DBRS commentaries “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.

For further information on the Programme, please refer to the rating report 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.

In DBRS’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the cash flow analysis. A review of the transaction’s legal documents was limited to the documentation pertaining to the issuance of Series CH ES0468675014. All the other 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 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 data and information used for these ratings include dynamic default performance data, loan-by-loan data and cover pool stratification tables provided by Liberbank that allowed DBRS to further assess the portfolio.

DBRS considers the information available to it for the purposes of providing these ratings 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 11 May 2017, when DBRS confirmed the rating on Liberbank CH following the completion of the annual review.

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 and US regulations only.

Lead Analyst: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 11 March 2014

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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)
-- Global Methodology for Rating 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.