DBRS Assigns Provisional Rating to Rural Hipotecario XVIII, FT

DBRS Ratings Limited (DBRS) assigned a provisional rating of AA (high) (sf) to the Series A notes to be issued by Rural Hipotecario XVIII (the Issuer).

The Series B notes have not been rated by DBRS.

The rating of the Series A notes addresses timely payment of interest and ultimate payment of principal on or before the Final Maturity Date.

The Issuer is expected to be a securitsation of residential mortgage loans secured by first-lien mortgages originated by Caja Rural de Aragón, Sociedad Cooperativa de Crédito (Bantierra or the Seller) in Spain. At the closing of the transaction, the Issuer will use the proceeds of the Series A and Series B notes to fund the purchase of the mortgage portfolio from the Seller. In addition, Bantierra will provide separate additional subordinated loans to fund both the initial expenses and the Reserve Fund. The securitisation will take place in the form of a fund, in accordance with Spanish securitisation law.

The securitised mortgage loans were originated by Bantierra. The mortgage loans are secured by first-lien mortgages over residential properties located in Spain. The transaction is managed by Europea de Titulización, Sociedad Gestora de Fondos de Titulización, S.A.

The originator and servicer of the transaction is Bantierra. The Account Bank and the Principal Paying Agent is Société Générale, Spanish Branch.

The ratings are based upon a review by DBRS of the following analytical considerations:

-- The transaction’s capital structure, form and available credit enhancement. The Series A notes benefit from EUR 21.7 million (8.5%) subordination of the Series B notes and EUR 11.48 million (4.5%) from the Reserve Fund, which is available to cover senior expenses as well as interest and principal of the Series A notes until paid in full. The Reserve Fund will amortise on each Payment Date up to the Target Reserve Amount, and becomes available to cover interest and principal for Series B once Series A has been fully amortised. The Reserve Fund will not amortise if certain performance triggers are breached. The Series A principal will be senior to the Series B interest payments in the priority of payments.

-- DBRS was provided with the provisional portfolio equal to EUR 272.5million as of 19 November 2018. At closing, the portfolio balance will be equal to the balance of the notes (EUR 255 million). The main characteristics of the total portfolio includes: (1) 56.9% weighted-average current loan-to-value (WACLTV) and 67.4% indexed; (2) the top three geographical concentrations of Aragon (87.3%), La Rioja (7.5%), and Catalonia (3.2%); (3) 5.1% of the borrowers are non-nationals, but all borrowers are residents; and (4) weighted-average loan seasoning of 5.9 years.

-- The loans are floating-rate mortgages linked to 12-month Euribor, but some of the loans initially pay a fixed rate up to a period of three years (6.8%) and then reset to a floating rate linked to 12-month Euribor. The notes are floating-rate liabilities indexed to three-month Euribor.

-- The credit quality of the mortgages backing the notes and the ability of the servicer to perform its servicing responsibilities. DBRS was provided with Bantierra’s historical mortgage performance data, as well as loan-level data for the mortgage portfolio. Details of the portfolio default rates (PDRs), loss given default (LGD), and expected losses (ELs) in DBRS’s credit analysis of the mortgage portfolio in the AA (high) (sf) stress scenario is detailed below.

-- The transaction’s account bank agreement and respective replacement trigger require Société Generale, Spanish Branch acting as the treasury account bank to find (1) a replacement account bank or (2) an account bank guarantor upon loss of an A (low) Account Bank applicable rating. The Account Bank applicable rating is the higher between one notch below the Account Bank’s Critical Obligations Rating (if it has one) or the Account Bank’s issuer rating.

-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and the consistency with the DBRS “Legal Criteria for European Structured Finance Transactions” methodology.

As a result of the analytical considerations, DBRS derived a Base Case PDR of 4.89% and LGD of 20.53%, which resulted in an EL of 1.00% using the European RMBS Insight Model. DBRS cash flow assumptions stress the timing of defaults and recoveries, prepayment speeds and interest rates. Based on a combination of these assumptions, a total of 16 cash flow scenarios were applied to test the capital structure and rating of the notes. The cash flow structure was analysed using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to this rating are:
“European RMBS Insight Methodology” and “European RMBS Insight: Spanish Addendum.”

DBRS has applied the principal methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include Caja Rural de Aragón, Sociedad Cooperativa de Crédito and Europea de Titulizaión, Sociedad Gestora de Fondos de Titulización, S.A.

DBRS does not rely upon third-party due diligence in order to conduct its analysis.

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

DBRS considers the 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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

In respect of the Series A notes, the PDR of 22.05% and LGD of 35.67%, corresponding to a AA (high) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PDR and LGD:
-- A hypothetical increase of the PDR of 25%, ceteris paribus, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the PDR of 50%, ceteris paribus, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to AA (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the PDR of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the PDR of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to A (sf).
-- A hypothetical increase of the PDR of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to A (low) (sf).
-- A hypothetical increase of the PDR of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).

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: Maria Lopez, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 7 December 2018

DBRS Ratings Limited
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London EC3M 3BY
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- European RMBS Insight Methodology
-- European RMBS Insight: Spanish Addendum
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.