DBRS Morningstar Assigns A (high) Rating to Cajamar Caja Rural S.C.C. Covered Bonds (Cédulas Territoriales - Public Sector)

DBRS Ratings GmbH (DBRS Morningstar) assigned an A (high) rating to the Cédulas Territoriales (CT or Spanish Public Sector Covered Bonds) issued under the Cajamar Caja Rural, Sociedad Cooperativa de Crédito (Cajamar or the Issuer) Covered Bonds programme (Cajamar CT or the Programme). The only outstanding CT (Cedulas Territoriales - ES0422714107) is a EUR 350 million fixed-rate bond with a coupon of 0.800%. The bond matures in March 2022.

The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (low). Cajamar is the Issuer and Reference Entity (RE) for the Programme. There is no Critical Obligations Rating (COR) associated with Cajamar, but DBRS Morningstar 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 the Programme.
-- A Cover Pool Credit Assessment (CPCA) of “A”, which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (low).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 42.9% to which DBRS Morningstar gives credit, which is the minimum level required by the Spanish public sector CB legislation. DBRS Morningstar gives full credit to such level in accordance with its principal methodology.

DBRS Morningstar analysed the transaction using its 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 one-notch downgrade of the CBAP would lead to a three-notch downgrade of the LSF-L, resulting in a three-notch downgrade of the covered bonds rating.

In addition, all else unchanged, the CB ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded to below “A”; (2) the sovereign rating of the Kingdom of Spain was downgraded to below A (low); (3) the LSF Assessment associated with the Programme was 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 CB and CP moved adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

The “Average” LSF Assessment associated with the Spanish CB programmes reflects DBRS Morningstar’s view of: (1) the satisfactory level of segregation of the cover pool assets, provided by the CT legal framework and the CT holders’ first-priority right on the entire public sector book of the Issuer, in combination with a residual commingling and set-off risk that DBRS Morningstar considers to be limited; (2) the absence of specific provisions and the uncertainty surrounding the timely liquidation of the CP to meet maturing CT in an assumed insolvency of the Issuer, as well as the lack of any short-term liquidity support, balanced by DBRS Morningstar’s expectation of forthcoming regulator support and an ability to support the CB instrument in line with a host sovereign that is rated “A” with a Stable trend; (3) the role of the Bank of Spain, which oversees the banking business and the CT business of the Issuer as a sole entity, and a history of regulatory intervention in the re-arrestment of financial institutions in recent years, which, in DBRS Morningstar’s view, benefit CT holders because of the structural nature of Spanish CT; and (4) the absence of contingency plans specific to the continuation of the CT, together with the medium penetration of the CT as a funding tool for Spanish financial entities.

As of 31 December 2020, the aggregated outstanding balance of the CP underlying the Issuer’s CB was EUR 1,498 million. The total amount of liabilities outstanding is EUR 350 million, yielding a current nominal OC ratio of 328.1%. The legal minimum OC level for CT is 42.9%.

As at September 2020, the CP comprised public sector assets amounting to EUR 1,336 million and was concentrated (100% of the CP) in Spain, the Domicile Sovereign. The RE is also located in Spain, the Host Sovereign. In DBRS Morningstar’s view, this exposes CB investors to an increased risk that the creditworthiness of the RE and the CP may deteriorate at the same time. According to DBRS Morningstar’s “Rating and Monitoring Covered Bonds” methodology, in this circumstance, the rating of the CB is typically capped at three notches above the rating of the sovereign.

As is customary in the Spanish market, CT holders do not receive the benefit of any swap contract to hedge the mismatches between the interest paid by the CP (49.3% floating rate linked to different indexes and reset dates) and the interest paid to the CB holders, paying a fixed-rate coupon. This risk is mitigated by the available OC and has been accounted for in DBRS Morningstar’s cash flow analysis.

The DBRS Morningstar-calculated WA life of the assets is approximately three years while that of the covered bonds is approximately one year. This generates an asset-liability mismatch that is mitigated by the available OC.

All CP assets and CB are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.

For further information on the Programme, please refer to the rating report at www.dbrsmorningstar.com.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020 22 period in select economies. These scenarios were last updated on 17 March 2021. For details see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 24 April 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated CBs in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/359987/covid-19-the-impact-on-european-covered-bonds and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating and Monitoring Covered Bonds” (27 April 2020).

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

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include loan-by-loan data on the CP as at 30 September 2020, containing, among others, information on the initial amount of the loan, residual amount, maturity date, amortisation type, underlying debtor, country of the debtor, guarantor, country of the guarantor, interest rate type, provided by the issuer.

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

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

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

This is the first DBRS Morningstar rating on this financial instrument.

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

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Tomás Rodríguez-Vigil, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 17 March 2021

DBRS Ratings GmbH, Sucursal en España
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Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating and Monitoring Covered Bonds (27 April 2020), https://www.dbrsmorningstar.com/research/360260/rating-and-monitoring-covered-bonds.
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (27 April 2020),
https://www.dbrsmorningstar.com/research/360263/rating-and-monitoring-covered-bonds-addendum-market-value-spreads.
-- Modelling Assumptions for Portfolios of Public Sector Exposures (12 August 2020) and Public Sector Model v 0.2.1, https://www.dbrsmorningstar.com/research/365614/modelling-assumptions-for-portfolios-of-public-sector-exposures.
-- Global Methodology for Rating Banks and Banking Organisations (8 June 2020),
https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020),
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020), https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- Global Methodology for Rating Sovereign Governments (27 July 2020), https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.
-- Rating CLOs and CDOs of Large Corporate Credit (8 February 2021), https://www.dbrsmorningstar.com/research/373423/rating-clos-and-cdos-of-large-corporate-credit.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].