DBRS Assigns Two New AA Ratings to Banco Sabadell S.A. Covered Bonds

DBRS Ratings Limited (DBRS) assigned a rating of AA to two new series issued under Banco Sabadell’s Cédulas Hipotecarias (CH, Spanish mortgage covered bonds) programme (the Programme).

The new series are CH I/2017 - 2 (ISIN ES0413860596) and CH II/2017 (ISIN ES0413860612). Series CH I/2017 - 2 is a EUR 100 million tap of the existing series CH I/2017, a fixed-rate note paying 1% annually and maturing in April 2027. Series CH II/2017 is a EUR 2 billion floating-rate note, indexed to Euribor 12 months plus a spread of 0.02% and maturing in October 2023.

Concurrently, DBRS confirmed its AA ratings on all other outstanding DBRS-rated CHs under the Programme.

As of today and including the two newly issued series, there were 54 series of CH outstanding, for a total amount of EUR 25.03 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A,” being the Long-Term Critical Obligations Rating (LT COR) of Banco Sabadell. Banco Sabadell 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 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 83% 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 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 bond ratings. In addition, all else unchanged, the CH ratings 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 of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (4) the relative amortisation profile of the CH and CP moved adversely; or (5) volatility in the financial markets were to cause the currently estimated market value spreads to increase.

The total outstanding amount of CH after issuance is EUR 25.03 billion, of which DBRS rates 32 bonds with an outstanding balance of EUR 20.10 billion. As of 30 June 2017, the aggregate balance of the mortgages in the cover pool was EUR 49.42 billion, which resulted in a total OC of 97%. The eligible cover pool stands at EUR 35.13 billion, resulting in an eligible OC of 40%.

As of June 2017, the cover pool (CP) comprised 467,343 mortgage loans with a 62% residential, 25% commercial, 10% developers and 3% land loan split and a weighted-average current unindexed loan-to-value ratio of 57%. It is geographically diversified, with higher concentrations in the Catalonia region (34.4%) and Community of Valencia (18.2%). Approximately 0.2% of the CP was originated in a currency other than euros. The pool is 82 months seasoned.

The vast majority of the loans in the cover pool (approximately 79%) are floating rate, while 42% of the liabilities pay fixed coupon (as of today and including the two newly issued CHs). As is customary in Spanish CH, no swaps are in place to cover interest rate mismatch between the CHs and the CP. 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 the two newly issued cédulas). 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”.

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 legal documents was limited to the final terms of Series CH I/2017 – 2 and Series CH II/2017.

Other methodologies and criteria 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 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 1 September 2017, when DBRS confirmed the AA ratings of Banco Sabadell CH following completion of the full review.

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 and US regulations only.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 3 September 2013

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor
London
EC3M 3BY
United Kingdom

Registered in England and Wales: No. 7139960

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
-- 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.