DBRS Confirms Ratings on Cajas Rurales Unidas Cédulas Hipotecarias and Maintains UR-Developing

DBRS Ratings Limited (DBRS) has today confirmed its A (high), Under Review with Developing Implications, rating on the outstanding Cédulas Hipotecarias (CH or the Spanish mortgage covered bonds) issued by Cajas Rurales Unidas Sociedad Cooperativa de Crédito (CRU). The confirmation follows the completion of a full review of the rating.

The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point reflective of CRU’s Likelihood to meet its payment obligations on the CH. CRU is the Issuer and Reference Entity for the programme.
-- A legal and structuring framework (LSF) assessment of Average assigned to CRU CH.
-- A Cover Pool Credit Assessment (CPCA) of “A”, being the lowest CPCA in line with the covered bonds rating.
-- A LSF-implied likelihood (LSF-L) of A (low).
-- A two notches uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 148% that DBRS gives credit to, being the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.90x.

DBRS is reviewing the implications of recent developments in European regulation and legislation regarding the Bank Recovery and Resolution Directive. DBRS has published a Request For Comments for the “Rating European Covered Bonds” methodology that proposes a new analysis for the determination of the Covered Bonds Attachment Point for those Reference Entities that are subject to the Bank Recovery and Resolution Directive. The under review status on the covered bonds will only be resolved once the conditions that lead to the assignment of review are finalised.

The transaction was modelled using the DBRS European Covered Bond Cash Flow Model. 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.

Everything else being equal, a downgrade of the Issuer Rating by one notch would lead to a downgrade of the LSF-L by three notches, resulting in a downgrade of the covered bonds rating by three notches.

In addition, everything else being equal, the ratings of the CH would be downgraded if any of the following occurred: (1) the CPCA were downgraded below “A”; (2) the sovereign rating of the Kingdom of Spain were downgraded below A (low); (3) the LSF assessment associated with the programme was downgraded; (4) the quality and consistency of the cover pool were no longer sufficient to support a two notch uplift for high recovery prospects; or (5) volatility in the financial markets caused the currently estimated market value spreads to be increased.

As of May 2015, the total outstanding amount of CH is EUR 5.05 billion, while the aggregate balance of the mortgages in the cover pool is EUR 18.360 billion, resulting in a total OC of 264%.

As of March 2015, the cover pool comprises 176,786 mortgage loans with a weighted-average current unindexed loan-to-value ratio of 66%, with a 60% residential, 26% commercial, 9% developers and 5% land loans split. It is geographically distributed among CRU’s main areas of influence: Andalusia (34%), Community of Valencia (28%) and Murcia (17%). The pool is 72 months seasoned.

The vast majority of the loans in the cover pool (approximately 97%) are floating rate, while 94% of the liabilities pay a fixed coupon. As customary in Spanish CH, swaps are not for the benefit of the CH holders. This has been accounted for in the DBRS cash flow modelling. The weighted-average life of the assets is roughly 12 years, while that of the CH is 2.9 years. This generates an asset-liability mismatch that is partly mitigated by the available OC.

For further information on CRU CH, please refer to the ratings report available on www.dbrs.com.

DBRS has assessed the LSF related to CRU CH as Average according to its rating methodology. For more information, please refer to the DBRS Commentary “Spanish Mortgage Covered Bonds: Legal and Structuring Framework Review” and “DBRS Assigns Legal and Structuring Framework Assessment to Spanish Mortgage Covered Bonds Programmes,” available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is: Rating European Covered Bonds (December 2014). This can be found at http://www.dbrs.com/about/methodologies. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

The sources of information used for this rating include historical default performance data and cover pool stratification tables that allowed DBRS to further assess the portfolio.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

The last rating action on this programme took place on 26 May 2015, when DBRS placed CRU CH’s ratings Under Review with Developing implications.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

For further information on DBRS historic default rates published by the European Securities and Markets Administration in a central repository, see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Covadonga Aybar
Initial Rating Date: 19 July 2013
Initial Rating Committee Chair: Quincy Tang

Lead Analyst: Covadonga Aybar
Rating Committee Chair: Diana Turner

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- Rating European Covered Bonds
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Rating CLOs Backed by Loans to Small and Medium-Sized European Enterprises (SMEs)
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model Methodology for European Securitisations

A description of how DBRS methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375