Morningstar DBRS Assigns AAA Credit Rating to Banco Sabadell S.A. Covered Bonds (Cédulas Hipotecarias - Mortgages) New Issuance

DBRS Ratings GmbH (Morningstar DBRS) assigned a AAA credit rating to a new series of covered bonds issued by Banco de Sabadell S.A. (Banco Sabadell or the Issuer) under the Banco Sabadell Covered Bonds (Cédulas Hipotecarias or CH) programme (the Programme).

The new CH (Cedulas Hipotecarias - ES0413860851) is a EUR 1,000 million fixed-rate bond that pays a coupon of 3.25%, maturing on 5 June 2034.

Concurrently, Morningstar DBRS discontinued its credit rating on CH ES0413860554, which matured on 20 October 2023.

All covered bonds (CBs) issued under the Programme rank pari passu with each other and Morningstar DBRS currently rates them AAA.

The credit ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high), which is Banco Sabadell’s Long Term Critical Obligations Rating. Banco Sabadell is the Issuer and Reference Entity for the programme.
-- A Legal and Structuring Framework (LSF) Assessment of “Strong” associated with the programme.
-- A Cover Pool Credit Assessment (CPCA) of A (low), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AA.
-- A two-notch uplift for high recovery prospects.
-- A level of vercollateralization (OC) of 46.6% to which Morningstar DBRS gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.85.
-- The sovereign rating on the Kingdom of Spain, rated ‘A’ with a Positive trend by Morningstar DBRS, as of the date of this press release.

Morningstar DBRS analysed the transaction with 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 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 CBs credit rating. In addition, all else unchanged, the CH credit ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below A (low); (2) the sovereign rating on the Kingdom of Spain were downgraded below A (low); (3) the LSF assessment associated with the Programme were downgraded to “Average” or below; (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 CP moved adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

This analysis does not consider the potential recovery uplift of up to two notches from the LSF-L that Morningstar DBRS may apply subject to the level of OC.

The total outstanding amount of CH under the programme is currently EUR 16.3 billion, of which Morningstar DBRS publicly rates EUR 6.1 billion.

As of March 2024, the assets in the CP amounted to EUR 25.7 billion. This resulted in a total OC of 58.1%.

Spanish CBs are backed by a specific portfolio of assets selected by the issuer. As of 31 March 2024, the CP comprised 281,795 mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 50.1% and a WA seasoning of 6.6 years.

The pool is composed of residential loans (83.9%) and commercial loans (12.6%). The remaining part of the portfolio (3.5%) is represented by liquid assets to cover the net liquidity outflow of the CB programme over the next 180 days.

The CP is geographically diversified across Spain, with higher concentrations in Catalonia (37.5%), Community of Valencia (14.5%) and Community of Madrid (13.2%).

As is customary in the Spanish market, CHs do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (32.7% floating-rate linked to different indexes and resets) and the interest paid to the CB holders (53.5% floating-rate linked to different indexes and resets). This risk is mitigated by the available OC and accounted for in Morningstar DBRS´ cash flow analysis.

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

The WA life of the assets is approximately 9.6 years while that of the CBs is 2.9 years. This maturity mismatch is mitigated by the available OC.

Morningstar DBRS 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 Mortgage Covered Bonds: Legal and Structuring Framework Review” commentary, and “The Updated Law on Spanish Covered Bonds: Well Aligned with the European Directive”, which can be found on https://dbrs.morningstar.com/.

Morningstar DBRS' credit ratings on the outstanding CB Series 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 principal amount.

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, GOVERNANCE CONSIDERATIONS
Credit rating actions on Banco Sabadell are likely to have an impact on these credit ratings.

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 ratings is Global Methodology for Rating and Monitoring Covered Bonds (2 April 2024), https://dbrs.morningstar.com/research/430636.

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

In Morningstar DBRS' opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, Morningstar DBRS focused on the cash flow analysis.

A review of the transaction legal documents was limited to the documentation pertaining to the issuance of CH ES0413860851. All the other 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 these credit ratings include CP stratification tables as of 31 March 2024 on Banco Sabadell’s CP and static pool default and recovery data on Banco Sabadell’s mortgage book provided by the Issuer.

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 impact the 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.

This credit rating concerns a newly issued financial instrument. This is the first Morningstar DBRS credit rating on this financial instrument.

The last credit rating action on this transaction took place on 28 June 2023, when Morningstar DBRS confirmed its AAA credit ratings to the CBs outstanding under the Programme.

The lead analyst responsibilities for this transaction have been transferred to Antonio Laudani.

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

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Antonio Laudani, Vice President, Credit Ratings
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 3 September 2013

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.

-- Global Methodology for Rating and Monitoring Covered Bonds (2 April 2024), https://dbrs.morningstar.com/research/430636.

-- Global Methodology for Rating Banks and Banking Organisations (15 April 2024), https://dbrs.morningstar.com/research/431155.

-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730.

-- European RMBS Insight Methodology (25 March 2024) and European RMBS Insight model v 8.0.0.0, https://dbrs.morningstar.com/research/430103.

-- European RMBS Insight: Spanish Addendum (8 March 2024),
https://dbrs.morningstar.com/research/429109.

-- 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 CLOs and Corporate CDOs (23 February 2024), https://dbrs.morningstar.com/research/428544.

-- Rating CLOs Backed by Loans to European SMEs (23 February 2024) and SME Diversity Model version 2.6.1.4, https://dbrs.morningstar.com/research/428543.

-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602.

-- 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].