Morningstar DBRS Finalises Provisional Credit Ratings on BBVA RMBS 23, FT

DBRS Ratings GmbH (Morningstar DBRS) finalised its provisional credit ratings on the residential mortgage-backed notes issued by BBVA RMBS 23 FT (the Issuer) as follows:

-- Class A notes at AA (sf)
-- Class B notes at A (high) (sf)

The credit rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal before the legal final maturity. The credit rating on the Class B notes addresses the full payment of interest and repayment of principal before the legal final maturity date.

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 Class A notes and Class B notes (together, the Notes) to purchase a portfolio of first-lien residential mortgage loans from Banco Bilbao Vizcaya Argentaria, S.A. (BBVA; rated A (high) with a Stable trend by Morningstar DBRS); Catalunya Banc, S.A. (CX); and UNIMM Banc, S.A. (UNIMM). BBVA will service the underlying mortgages in this transaction.

The Class A notes benefit from the EUR 109 million (2.0% of the Notes) subordination of the Class B notes plus the EUR 272.5 million (5.0% of the Notes) reserve fund, which is available to cover senior expenses as well as interest and principal of the Class A notes until they are paid in full. The Class 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 Class B notes once the Class A notes are repaid in full. The reserve fund will amortise with a target level being equal to the lower of (1) 10.0% of the outstanding balance and (2) 5.0% of the initial balance of the Class A notes and Class B notes, respectively, subject to a floor of EUR 136.3 million. The reserve fund will not amortise if certain performance triggers are breached. The Class A notes will benefit from full sequential amortisation, whereas the principal on the Class B notes will not be paid until the Class A notes have been redeemed in full. Additionally, the Class A principal will be senior to the Class B interest payments in the priority of payments.

Up to their maturity, Class A notes will pay a floating coupon rate of three-month Euribor plus a margin of 0.15% floored at 0.0%. Class B notes will also pay a floating coupon rate of three-month Euribor plus a margin of 0.25% floored at 0.0%. Both Class A and Class B notes will pay interest on a quarterly basis.

Morningstar DBRS was provided with a provisional portfolio equal to EUR 5.6 billion as of 6 April 2024 (the cut-off date), which consisted of 51,476 loans extended to 51,472 borrowers. As of the cut-off date, the weighted-average (WA) original loan-to-value ratio (LTV) stood at 74.2% whereas the WA current LTV was 62.6%. The mortgage loan portfolio is distributed among the Spanish regions of Catalonia (25.7% by current balance), Andalusia (17.3%), and Madrid (15.4%). The mortgage loans in the asset portfolio are almost all owner occupied, with 3.6% classified as second homes. All the loans in the pool pay on a repayment basis and 7.4% have a balloon payment at maturity that is 37.9% of the loan balance on average. Of the portfolio balance, 13.4% of the loans were granted to self-employed borrowers. As of the cut-off date, 0.6% of the mortgage loans were no more than 90 days in arrears, the WA coupon of the mortgages was 3.8%, and the WA seasoning was 7.6 years.

Of the portfolio balance, 80% are mortgages that allow for loan modifications subject to defined criteria, depending on the type of mortgage product. The majority of the portfolio balance consists of loans eligible for margin or interest rate reduction. The allowable loan modifications include (1) change of maturity date, (2) change to the type of interest, (3) change in the amortisation profile, and (4) margin or interest rate reductions. The loan modifications are integrated into the loan contracts and are seen as complementary to the permitted variation under the transaction's documents. Additionally, the servicer can grant loan modifications without the management company's consent.

Currently, 46.6% of the portfolio are fixed-rate loans up to maturity and 29.1% are fixed-rate loans that will switch to a floating rate indexed to 12-month Euribor or Indice de Referencia de Préstamos Hipotecarios (IRPH). The remaining 24.3% of the portfolio are floating-rate loans indexed to 12-month Euribor or IRPH. In comparison, the Notes are floating rate linked to three-month Euribor. The Issuer's fixed-floating risk and basis risk exposure is hedged through an interest rate swap agreement that references the total interest earned on the mortgage loans and pays the Issuer the WA interest rate of the bonds plus 0.65% multiplied by the outstanding balance of the nondelinquent loans (the notional amount).

The transaction's account bank agreement and replacement trigger require BBVA acting as the treasury account bank to find (1) a replacement account bank or (2) an account bank guarantor upon loss of an applicable A (low) account bank rating. Morningstar DBRS' Long Term Critical Obligation Rating (COR), Long-Term Senior Debt rating and Issuer Rating, and Long-Term Deposits rating on BBVA are AA (low), A (high), and A (high), respectively, as of the date of this press release. The applicable account bank rating is the higher of one notch below the COR, Long-Term Senior Debt rating, and Long-Term Deposits rating on BBVA. Based on Morningstar DBRS' current reference rating of A (high) on BBVA, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Class A notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS based its credit rating 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. The mortgage portfolio was analysed in accordance with Morningstar DBRS' "European RMBS Insight Methodology" and "European RMBS Insight: Spanish Addendum".
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as the existence of an experienced and highly rated 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 Class A and B 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 Class 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 ratings are the European RMBS Insight Methodology (25 March 2024), https://www.dbrsmorningstar.com/research/430103 and the European RMBS Insight: Spanish Addendum (8 March 2024), https://www.dbrsmorningstar.com/research/429109.

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 principal methodology.

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 this credit rating were provided by Europea de Titulización, S.G.F.T. and BBVA. The sources include the loan-level data as of 6 April 2024 and historical performance data (delinquencies, defaults, recoveries, prepayments, and repossession data) covering the period from January 2014 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 rating, Morningstar DBRS was 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.

These credit ratings concern an expected to be issued new financial instrument. These are the first credit rating actions since the Initial Rating Date.

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 rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

In respect of the Class A notes, a PD of 13.0% and an LGD of 41.3% corresponding to the AA (sf) credit rating scenario was stressed, assuming a 25% and 50% increase in the PD and LGD.

Class 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 (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of A (low) (sf)

In respect of the Class B notes, a PD of 10.3% and an LGD of 37.5% corresponding to the A (high) (sf) credit rating scenario was stressed, assuming a 25% and 50% increase in the PD and LGD.

Class B Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of A (high) (sf)
-- 50% increase in LGD, expected credit rating of A (sf)
-- 25% increase in PD, expected credit rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD, expected credit rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BBB (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: Rehanna Sameja, Senior Vice President
Initial Rating Date: 13 June 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 8.0.0.0, https://www.dbrsmorningstar.com/research/430103
-- European RMBS Insight: Spanish Addendum (8 March 2024), https://www.dbrsmorningstar.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
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754
-- 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].