Spanish Covered Bonds: Legal and Structuring Framework Review

The commentary provides an overview of DBRS Morningstar’s understanding of the current Legal and Structuring Framework (LSF) of the Spanish covered bonds (CB), in terms of both the legislation and regulations applicable to them, and common contractual provisions, if any.

LSF assessment is one of the four pillars of DBRS Morningstar criteria when assigning ratings to covered bonds in accordance with DBRS Morningstar’s Rating European Covered Bonds methodology. LSF assessment is assigned to each CB programme rated by DBRS Morningstar based on the specific structural features of the programme.

DBRS Morningstar understands that the legislation currently in place gives CB holders a preferential right on the cash flows derived from the mortgage credits and loans in the cover pool, as well as those cash flows deriving from the liquidity buffer, and substitute assets and derivative instruments in the cover pool, if any.

Furthermore, the legislation also contains a number of what may be considered beneficial features for CB holders, such as:
-- The insolvency judge or the Fund for Orderly Bank Restructuring (FROB), in the event of the issuer's insolvency or resolution, respectively, will appoint a special administrator to manage the CB programme.
-- CB issuers shall designate an independent party to monitor the CP (cover pool monitor), which needs to be approved by the regulator (Bank of Spain).
-- The cover pool shall include at all times a dynamic liquidity buffer to cover temporary liquidity constraints. This buffer shall cover the net liquidity outflow of the CB programme over the following 180 days.