Morningstar DBRS Confirms AA (low) Credit Rating of Cajamar Caja Rural S.C.C. Covered Bonds (Cédulas Territoriales - Public Sector)

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AA (low) credit rating on the outstanding series of covered bonds issued by Cajamar Caja Rural, Sociedad Cooperativa de Crédito (Cajamar or the Issuer) under the Cajamar Public Sector Covered Bonds (Cédulas Territoriales or CT) programme (the Programme). There is one outstanding CT (Cédulas Territoriales - ES0422714180) under the Programme, which is a EUR 750 million fixed-rate bond with a coupon of 3.55%. The bond matures on 17 March 2029 and has an extension period of 12 months.

The credit rating is based on the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of BBB, which is one notch above Cajamar’s Long Term Issuer Rating. Cajamar is the Issuer and Reference Entity (RE) for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of “Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (high), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of “A”.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 36% to which Morningstar DBRS gives credit, which is the OC level considered to be sustainable based on information from the Issuer. The minimum level of OC observed over the past 12 months was 93.1%, in June 2023.
-- The sovereign credit rating of the Kingdom of Spain, rated “A” with a Stable trend by Morningstar DBRS, as of the date of this press release.

Morningstar DBRS analysed the transaction with its European Covered Bonds 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 CP.

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 bonds credit ratings.

In addition, all else unchanged, the CT credit ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below BBB (high); (2) the sovereign credit rating on the Kingdom of Spain was downgraded 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 CT and the CP moved adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

The total outstanding amount of CT under the Programme was EUR 750 million as of end December 2023, while the CP comprised public-sector assets amounting to EUR 1,502 million. This resulted in a total estimated OC of 100.3%.

The CP was concentrated (100% of the CP) in Spain, the domicile sovereign. The RE is also located in Spain, the host sovereign. In Morningstar DBRS’ 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 Morningstar DBRS’ “Global Methodology for Rating and Monitoring Covered Bonds”, in these circumstances, Morningstar DBRS considers that the CB credit rating is unlikely to be more than three notches higher than the credit rating on the host sovereign.

As is customary in the Spanish market, Cajamar CTs do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (69.9% floating rate linked to different indexes and resets) and the interest paid to the CB holders (100% fixed rate). This risk is mitigated by the OC available and accounted for in Morningstar DBRS´ cash flow analysis.

There is a maturity mismatch between the principal payments of the CT and the amortisation profile of the CP assets. However, unlike in most CB programmes, assets’ weighted-average life (3.9 years as per Morningstar DBRS’ calculation) is shorter than that of the liabilities (5.0 years). This asset-liability mismatch is mitigated by the available OC and accounted for in the "Strong" LSF Assessment associated with the Programme.

Morningstar DBRS has assessed the LSF related to the Programme as “Strong” according to its “Global Methodology for Rating and Monitoring Covered Bonds”. For more information, please refer to Morningstar DBRS’ “Spanish Covered Bonds: Legal and Structuring Framework Review” commentary, available at https://dbrs.morningstar.com/research/399644.

For further information on the Programme, please refer to the rating report at https://dbrs.morningstar.com.

Morningstar DBRS’ credit rating on the Issuer's covered bond series addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Payment Amounts and the related Principal Balance.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on the Issuer are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the Issuer are discussed separately at https://dbrs.morningstar.com/issuers/21611.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023), https://dbrs.morningstar.com/research/413651.

Other methodologies referenced in this transaction are listed at the end of this press release.

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

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

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include loan-by-loan data on the CP as at 31 December 2023 containing, among others, information provided by the Issuer on the initial amount of the loan, residual amount, maturity date, amortisation type, underlying debtor, country of the debtor, guarantor, country of the guarantor, and interest rate type.

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

At the time of the initial credit ratings, Morningstar DBRS was not supplied with third-party assessments. However, this did not affect the credit rating analysis.

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

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

The last credit rating action on this transaction took place on 28 March 2023, when Morningstar DBRS finalised its provisional rating on the covered bond issued under the CT programme.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Tomas Rodriguez-Vigil Junco, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 17 March 2023

DBRS Ratings GmbH, Sucursal en España
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28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259]

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023),
https://dbrs.morningstar.com/research/413651
-- Global Methodology for Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (8 May 2023),
https://dbrs.morningstar.com/research/413652
-- Global Methodology for Rating Banks and Banking Organisations (22 June 2023),
https://dbrs.morningstar.com/research/415978
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Modelling Assumptions for Portfolios of Public Sector Exposures (12 July 2023) and Morningstar DBRS Public Sector Model v 0.2.1.,
https://dbrs.morningstar.com/research/417064
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024),
https://dbrs.morningstar.com/research/429054
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572
-- Global Methodology for Rating Sovereign Governments (6 October 2023),
https://dbrs.morningstar.com/research/421590
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030

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

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