DBRS Confirms A (high) Rating on Liberbank Cédulas Hipotecarias

DBRS Ratings Limited (DBRS) confirmed its A (high) rating on the single stand-alone Cédula Hipotecaria (CH, Spanish mortgage covered bonds) issued by Liberbank S.A. (Liberbank or the Issuer). The confirmation follows the completion of a full review of the rating.

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 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), which is 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 135% to which DBRS gives credit, which is the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.90.

The transaction was analysed using the DBRS European Covered Bond Cash Flow Tool. 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 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 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 CP 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 6.18 billion. As of March 2019, the aggregate balance of the mortgages in the CP was EUR 15.51 billion, resulting in a total pro-forma OC of 151%. The eligible CP stands at EUR 13.38 billion, resulting in an eligible OC of 117%.

As of March 2019, the CP amounted to EUR 15.51 billion, split between 85.9% residential and 14.1% non-residential mortgages. The CP comprises 217,637 mortgage loans with a weighted-average (WA) loan-to-value of 56.3%. It is geographically distributed mainly in the Spanish regions of Madrid (22.1%), Castilla–La Mancha (21.9%) and Asturias (14.0%). The pool is 7.8 years seasoned, the underlying loans’ reference rate is primary floating (78.8%) and all loans are originated in euros.

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 CP (78.8% floating rate linked to different indexes and resets) and the interest due on the CH (43.3% paying fixed). The interest rate risk is partially covered by the high level of OC available.

The WA life of the assets is roughly ten years while that of the covered bonds is roughly six years. This generates an asset-liability mismatch that is partly mitigated by the available OC.

For further information on Liberbank CH, please refer to the rating report available at www.dbrs.com.

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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Rating European Covered Bonds.”

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

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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 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: https://www.dbrs.com/research/333487/rating-sovereign-governments.pdf.

The sources of data and information used for the rating includea dynamic default performance data, loan-by-loan data and CP stratification tables provided by Liberbank that allowed DBRS to further assess the portfolio.

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 considers the 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 programme took place on 11 May 2018, when DBRS confirmed its A (high) rating on Liberbank Cédulas Hipotecarias’ single stand-alone issuance following the annual review of the programme.

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, Assistant Vice President
Rating Committee Chair: Quincy Tang, Managing Director
Initial Rating Date: 11 March 2014

DBRS Ratings Limited
20 Fenchurch Street, 1st 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
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal 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
-- Interest Rate Stresses for European Structured Finance Transactions
-- Rating Sovereign Governments

A description of how DBRS 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.