Morningstar DBRS Finalises Provisional Credit Ratings on Rural Hipotecario XX, Fondo de Titulizacion de Activos

DBRS Ratings GmbH (Morningstar DBRS) finalised its provisional credit ratings on the residential mortgage-backed notes issued by Rural Hipotecario XX, Fondo de Titulizacion de Activos (the Issuer) as follows:

-- Series A notes at AA (sf)
-- Series B notes at BBB (high) (sf)

The credit rating on the Series A notes addresses the timely payment of interest and the Issuer’s obligation to repay full principal amount on the notes by the legal final maturity date in September 2062. The credit rating on the Series B notes addresses the full payment of interest and principal on the notes by the legal final maturity date in September 2062.

CREDIT RATING RATIONALE
The Issuer, a special-purpose vehicle established as a Fondo de Titulización (FT) governed by Spanish regulations, used the proceeds of the Series A notes and Series B notes (collectively, the Notes) to purchase a portfolio of first-lien residential mortgage loans from five Spanish rural savings banks at closing. Caja Rural de Aragón, S.C.C.; Caja Rural de Extremadura, S.C.C.; Caja Rural de Gijón, S.C.A.C.; Caja Rural de Zamora, C.C.; and Cajasiete, Caja Rural, S.C.C. are the originators, sellers, and servicers under this transaction. If the servicers are disrupted, Banco Cooperativo will step in and assume this role.

The Series A notes benefit from the EUR 55.3 million (8.5% of the Notes) subordination of the Series B notes plus the EUR 29.3 million (4.5% of the Notes) reserve fund, which is available to cover senior expenses as well as interest and principal of the Series A notes until they are paid in full. The Series B notes also benefit from the credit support from the reserve fund, which is available to cover senior expenses as well as interest and principal on the Series B notes once the Series A notes are repaid in full. The reserve fund will amortise with a target level being equal to the lower of (1) 9.0% of the outstanding balance and (2) 4.5% of the initial balance of the Series A notes and the Series B notes, respectively, subject to a floor of EUR 14.6 million. The reserve fund will not amortise if certain performance triggers are breached. The Series A notes benefit from full sequential amortisation, whereas principal on the Series B notes will not be paid until the Series A notes have been redeemed in full. Additionally, the Series A principal will be senior to the Series B interest payments in the priority of payments.

Up to their maturity, the Series A notes will pay a floating coupon rate of three-month Euribor plus a margin of 0.3% floored at 0.0%. The Series B notes will also pay a floating coupon rate of three-month Euribor plus a margin of 0.45% floored at 0.00%. Both the Series A and Series B notes will pay interest on a quarterly basis.

As of 12 February 2024, the provisional portfolio consisted of 11,312 loans with an aggregate principal balance of EUR 753.8 million. The average loan balance is EUR 66,636. The entire portfolio comprises floating-rate, amortising loans. The weighted-average (WA) seasoning of the portfolio is 7.2 years with a WA remaining term of 20.8 years. The WA current loan-to-value ratio of the portfolio using updated valuations is 61.3%; the WA coupon is 4.9%; and the WA spread is 1.6%. Approximately 25.6% of the borrowers are self-employed, and 2.2% of the borrowers are foreign residents in Spain. The portfolio of loans assigned on the closing date will be randomly selected among this provisional portfolio in a manner that will not be adverse to the Issuer and will comply with the loan eligibility criteria. Therefore, the characteristics of the final portfolio will not be identical to those of the described provisional portfolio.

In line with recent Rural Hipotecario transactions, the Issuer will not enter into a swap agreement to hedge the basis risk existing between the reference rates of the assets and the liabilities. Also, because of the permitted variations under the transaction documentation, up to 10% of the portfolio could switch to a fixed-rate mortgage, exposing the transaction to interest rate risk.

Société Générale Sucursal en España (SGSE) will act as the Account Bank and Paying Agent for the transaction.

Morningstar DBRS based its credit ratings primarily on the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement and liquidity provisions.
-- Estimated stress-level probability of default (PD), loss given default (LGD), and expected loss levels on the mortgage portfolio, which were used as inputs into the cash flow engine. Morningstar DBRS analysed the mortgage portfolio in accordance with its “European RMBS Insight Methodology” and the “European RMBS Insight: Spanish Addendum”.
--The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as the existence of a backup servicer and the liquidity provided by the reserve account.
-- The transaction parties’ financial strength to fulfil their respective roles.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the terms and conditions of the Notes.
-- The consistency of the transaction’s legal structure with Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology and the expectation of legal opinions addressing the assignment of the assets to the Issuer.

Morningstar DBRS’ credit ratings on the Notes address 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 Note Balances.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) 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
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.

Morningstar DBRS analysed the transaction structure in Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the credit ratings are the “European RMBS Insight Methodology” (25 March 2024), https://dbrs.morningstar.com/research/430103 and the “European RMBS Insight: Spanish Addendum” (8 March 2024), https://dbrs.morningstar.com/research/429109.

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

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

An asset and a cash flow analysis were both conducted.

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 these credit ratings were provided by Europea de Titulización, S.G.F.T. and the respective five rural savings banks—Caja Rural de Aragón, S.C.C.; Caja Rural de Extremadura, S.C.C.; Caja Rural de Gijón, S.C.A.C.; Caja Rural de Zamora, C.C.; and Cajasiete, Caja Rural, S.C.C.—and include the loan-level data as of 12 February 2024 and historical performance data (delinquencies, defaults, recoveries, and prepayment data) from previous securitisations covering the period from January 2009 to December 2023.

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 supplied with third-party assessments. However, this did not affect the credit rating analysis.

Morningstar DBRS was supplied with one or more third-party assessments. Morningstar DBRS did not apply additional cash flow stresses in its credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings 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.

These credit ratings concern newly issued financial instruments. These are the first Morningstar DBRS credit ratings on these financial instruments.

This is the first credit rating action since the Initial Rating Date.

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):

In respect of the Series A notes, a PD of 14.3% and an LGD of 44.8%, corresponding to the AA (sf) credit rating scenario, was stressed assuming a 25.0% and 50.0% increase in the PD and LGD.

Series A Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AA (sf)
-- 50% increase in LGD, expected credit rating of AA (low) (sf)
-- 25% increase in PD, expected credit rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of A (high) (sf)
-- 50% increase in PD, expected credit rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of A (sf)

In respect of the Series B notes, a PD of 8.0% and an LGD of 32.8%, corresponding to the BBB (high) (sf) credit rating scenario, was stressed assuming a 25.0% and 50.0% increase in the PD and LGD.

Series B Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of BBB (sf)
-- 50% increase in LGD, expected credit rating of BBB (low) (sf)
-- 25% increase in PD, expected credit rating of BBB (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BBB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in PD, expected credit rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BB (high) (sf)

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: Álvaro Astarloa, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 23 April 2024

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81, Plantas 26 & 27
28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
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.

-- European RMBS Insight Methodology (25 March 2024) and European RMBS Insight model v 7.0.0.0, https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: Spanish Addendum (8 March 2024), https://dbrs.morningstar.com/research/429109
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024), https://dbrs.morningstar.com/research/429054
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- 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].