DBRS Upgrades Banco Bilbao Vizcaya Argentaria S.A. Covered Bonds (Cédulas Hipotecarias - Mortgages) to AAA

DBRS Ratings Limited (DBRS) has today upgraded to AAA from AA the outstanding Cédulas Hipotecarias (CH or the Spanish mortgage covered bonds) issued by Banco Bilbao Vizcaya Argentaria S.A. (BBVA or the Issuer) EUR 25 billion CH programme (the Programme).

Previously BBVA CH’s LSF-Implied Likelihood (LSF-L) was limited to the Covered Bonds Attachment Point (CBAP) due to the lack of portfolio performance data. BBVA have now provided DBRS with performance data and will continue to do so. Hence, in DBRS’s view, t the previous limit does not apply anymore given the increased data availability.

Concurrently, DBRS has discontinued the ratings on Cédula Hipotecária 20 (ES0413211196) that matured on 1 March 2017 and Cédula Hipotecária 21 (ES0413211238) that matured on 20 June 2017.

There are 45 series of CH outstanding under the Programme, with a nominal amount of EUR 22.36 billion.

The ratings are based on the following analytical considerations:
-- A CBAP of A (high), which is the Long Term Critical Obligations Rating of BBVA. BBVA is the Issuer of and Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of AA (low), which is the lowest CPCA in line with the LSF L.
-- An LSF-L of AA.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 145.6% to which DBRS gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.85.

The transaction was modelled with 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 (CP).

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 ratings by one notch.

In addition, everything else being equal, the CH ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below AA (low); (2) the sovereign rating of the Kingdom of Spain was downgraded below A (low); (3) the LSF Assessment associated with the Programme was downgraded; (4) the quality of the cover pool 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 CP were to move adversely; or (6) volatility in the financial markets were to cause the currently estimated market value spreads to increase.

As of today, the total outstanding amount of CH was EUR 22.36 billion (of which DBRS rates eight bonds publicly with an outstanding balance of EUR 9.37 billion) while the aggregate balance of the mortgages in the cover pool at 30 June 2017 was EUR 77.61 billion, resulting in a total OC of 247.1%. The eligible cover pool stands at EUR 47.40 billion, resulting in an eligible OC of 112.0%.

As of 30 June 2017, the cover pool amounted to EUR 77.61 billion split between 83.5% residential, 8.4% commercial and 8.1% developers. The cover pool comprises 943,857 mortgages with a weighted-average (WA) current unindexed loan-to-value ratio of 73.2%. It is geographically distributed mainly in Catalonia (38.3%), Madrid (15.1%) and Andalusia (13.5%). The pool is 100 months seasoned and the reference rate of the underlying loans is primary floating (93.2%). 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 (93.2% floating rate linked to different indexes and resets) and the interest due on the CH (76.5% paying fixed and 23.5% 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 119.9 million at the spot rate as of 30 June 2017 (0.5% of the aggregate CH outstanding). In DBRS’s view this exposure is mitigated by the OC available.

The DBRS-calculated 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.

DBRS has assessed the LSF related to the Programme as Average according to its rating methodology. For more information, please refer to DBRS’s commentaries “Spanish Mortgage Covered Bonds: Legal and Structuring Framework Review” and “DBRS Assigns Legal and Structuring Framework Assessment to Spanish Mortgage Covered Bonds Programmes,” both available at www.dbrs.com.

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

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 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 at 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 these ratings include investor reports, historical default performance data and cover pool stratification tables 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 these ratings 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 16 February 2017, when DBRS confirmed the AA ratings on BBVA CH following the completion of the annual review.

The lead analyst responsibilities for this transaction have been transferred to Roger Bickert.

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: Roger Bickert, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 20 February 2013

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

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