DBRS Finalises Provisional Ratings on SRF 2017-1 Fondo de Titulizacion

DBRS Ratings Limited (DBRS) has today finalised its provisional ratings of AAA (sf) on the EUR 248 million Class A Notes, A (sf) on the EUR 40 million Class B Notes, BBB (sf) on the EUR 16 million Class C Notes and BB (sf) on the EUR 12 million Class D Notes. The EUR 84 million Class E Notes are unrated. The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal. The ratings on the Class B Notes, Class C Notes and Class D Notes address the ultimate payment of interest and ultimate payment of principal. Credit enhancement is provided in the form of subordination. The Class A Notes also benefit from an amortising Reserve Fund that provides liquidity support. The initial balance of the reserve fund is equal to 2.5% of the Class A Notes. The Reserve Fund is amortising and is subject to a floor of 1.75% of the initial Class A Notes balance. The Reserve Fund also provides liquidity and credit support to all notes on the earliest of (1) the payment date on which the Class A Notes fully amortise down or (2) the legal final maturity.

On any interest payment date from closing, the rated notes may be redeemed in full. The rated notes will be redeemed in full following a seller portfolio purchase. The rated notes may only be redeemed provided the Issuer has the necessary funds to pay all outstanding amounts of the notes and amounts ranking prior. If the rated notes are redeemed within two years from the closing date, the repurchase price of the portfolio will include Class A, Class B, Class C and Class D make-whole amounts. As of the payment date in April 2022, the interest on the rated notes increases.

Proceeds from the issuance of the Class A to E Notes will be used to purchase Spanish residential mortgage loans. The mortgage loans were originated by Catalunya Banc, S.A. (CX), Caixa d’Estalvis de Catalunya, Caixa d’Estalvis de Tarragona and Caixa d’Estalvis de Manresa. The latter three entities were merged into Caixa d’Estalvis de Catalunya, Tarragona i Manresa, which was subsequently transferred to Catalunya Banc, S.A. by virtue of a spin-off on 27 September 2011. During 2011 and 2012, CX received capital investment from the Fund for Orderly Bank Restructuring (FROB), effectively nationalising the bank.

As part of its divestment in CX, the FROB sold a portfolio of loans that were transferred to a securitisation fund, FTA 2015, Fondo de Titulizacion de Activos (the 2015 Fund) via the issuance of mortgage participation and mortgage transfer certificates, which represent the legal and economic interest in the mortgage loans. Following the sale of the mortgage loans in 2015, Banco Bilbao Vizcaya Argentaria S.A. (BBVA) acquired CX on 24 April 2015. Subsequently, CX was absorbed and merged with BBVA. BBVA will act as Collection Account Bank and Master Servicer, with servicing operations delegated to Anticipa Real Estate, S.L.U. (Anticipa or Servicer) in its role as Servicer.

The 2015 Fund sold the mortgage loans to SRF Intermediate 2017-1 S.A.R.L. (the Seller), which subsequently sold and transferred the mortgage certificates and participations to the Issuer. The Seller is a private limited company incorporated under the laws of Luxembourg and is a wholly owned subsidiary of the retention holder, Spain Residential Finance S.A.R.L. The retention holder subscribed to the Class E Notes and guarantees the obligation of the Seller to repurchase ineligible mortgage certificates resulting from a breach of representation and warranties. Titulizacion de Activos, S.G.F.T., S.A. (TDA) has been appointed as the Management Company and back-up servicer facilitator.

The current balance of the mortgage portfolio (as of 27 February 2017) is equal to EUR 400,000,000. The Weighted-Average Current Loan-to-Value (WACLTV) of the mortgage portfolio is 60.8%, with the Indexed WACLTV calculated by DBRS at 84.4%, (INE, TINSA Q4 2015). The seasoning of the portfolio is 9.3 years, with the origination vintages concentrated in 2006 to 2009 (63.9%). Junior liens represent 4.3% of the portfolio. All prior liens are included in the securitsation. DBRS has factored subordinated ranking of second liens into the loss analysis.

The portfolio is largely concentrated in the autonomous region of Catalonia (75.7%). CX as originator was headquartered in Barcelona and focused its lending strategy in Catalonia. The concentration in a particular region leaves the transaction exposed to house price fluctuations, economic performance and changes in regional laws. Although the peak-to-trough house price decline observed in Catalonia was higher than the national average at 46.63%, prices have recovered 14.8% (Q4 2016). GDP and unemployment have also shown improvement, with estimated GDP figures for 2015 demonstrating an increase of 3.9% compared with a growth rate of 1.4% at the end of 2014. Unemployment has fallen to 14.8% as of Q4 2016 from 24.5% in Q1 2013.

Multi-credit loans represent 52.1% of the pool and permit the borrower to make additional drawdowns. The borrower may not draw down in excess of the amounts stated in the mortgage agreement. Borrower eligibility for additional drawdowns is subject to key conditions. Generally, a borrower must not be in default, and restrictions are also placed on the debt-to-income ratios. Once eligibility has been established, drawdown is subject to additional criteria such as caps on the maximum drawdown amounts, maturity restrictions and LTV caps. Further drawdowns under the multi-credit agreement will be funded by the 2015 Fund. The various drawdowns among the multi-credit rank pari passu. Upon enforcement of a property securing multi-credit loans, the proceeds applied would first repay the fund for any expenses incurred, with the remainder distributed between the Issuer and the 2015 Fund on a pro rata basis.

The majority of the pool (79.3%) consists of loans that have been restructured or have benefitted from a grace period in the past. DBRS has assessed the historical performance of the mortgage loans and factored restructuring arrangements into its default analysis. As of the closing date, the pool does not contain borrowers who have gone into arrears of more than 35 days over the previous 24 months. As of the closing pool cut-off date, 0% of the pool is more than 30 days in arrears.

The transaction is exposed to unhedged basis risk with the assets linked to 12-month Euribor (83.5%), Mibor (0.2%) and IRPH (15.8%). The remaining portion (0.5%) pays a fixed rate of interest. The notes are linked to three-month Euribor. The weighted interest rate of the portfolio is calculated at 1.5%, with the weighted-average margin equal to 1.3%. Moreover, 60.1% of the mortgage portfolio is eligible to receive reductions on the margin dependent on the additional products a borrower has with BBVA. The margin can potentially reduce to 1.2% after reduction.

Approximately 25.9% of the pool was subject to interest rate floors in the past. As of 1 July 2016, interest rate floors are no longer applied. An Interest Rate Floor Clause (IRFC) reserve fund will be established to mitigate the potential risk of remediation payments to the borrowers as a consequence of the ruling by Spanish courts declaring floor clauses abusive. The IRFC reserve will be funded by the 2015 Fund for potential remediation of amounts accrued between 31 March 2014 and 1 July 2016. Amounts payable by the 2015 Fund are guaranteed by the Retention Holder via the retention holder guarantee. Spain Residential Finance S.a.r.l. provides a guarantee on the obligation of the seller to pay the repurchase price of an ineligible mortgage certificate and the obligation to compensate the fund in respect of compensation payments due to the issuer, by the 2015 Fund, with respect to interest rate floors.

On 21 December 2016, the European Court of Justice ruled that Spanish banks whose interest rate floor clauses in mortgage contracts are declared to be null and void by a domestic court must repay the corresponding revenues received since activation of the floor clause to customers. Procedural guidelines for customer protection were set out in a Royal Decree law passed on 20 January 2017 allowing lenders one month to inform customers of their right to compensation and a further three months to reach a settlement after receiving a claim.

An indirect impact on the transaction may come from retroactive compensation arrangements starting from the date the interest rate floor clauses were activated. In DBRS’s view, the impact on securitisations of Spanish mortgages is likely to depend primarily on the form of compensation implemented by the banking sector.

Compensating the customer by adjusting the payment schedule of the loan, either by reducing the interest instalments due or by writing down the outstanding principal, will have the largest potential impact on the transaction. In the former case, DBRS expects the special-purpose vehicle (SPV) to be protected by representations and warranties and, failing that, through the implementation of minimum interest rate provisions on the portfolio. Margin reductions, while having a negative impact on excess spread, may also have the side effect of improving a borrower’s capacity to repay their mortgage, reducing delinquency levels and potentially translating into decreased portfolio loss rates. In the latter case, DBRS’s baseline scenario is that the bank would be unable to unilaterally write down the principal of an asset that has been transferred to an SPV in a “true sale.” As a result, the bank would be obliged to either repurchase the loan from the pool or to reimburse the SPV for the lost principal.

BBVA is in place as the Master Servicer and Collection Account Bank. Anticipa, as the servicer of the mortgage loans, will act in the name of BBVA on behalf of the fund. BBVA will deposit amounts received that arise from the mortgage loans with the Issuer Account Bank within two business days. The servicer is able to renegotiate terms of the loans with borrowers subject to certain conditions being met. Permitted variations are limited to 5% of the initial pool balance and are limited to margin reduction and maturity extension.

BNP Paribas Securities Services, Spanish Branch (BNP) is the Issuer Account Bank and Paying Agent for the transaction. DBRS privately rates BNP with a Stable trend. DBRS has concluded that BNP meets DBRS’s minimum criteria to act in such capacity. The transaction contains downgrade provisions relating to the account bank where, if downgraded below “A,” the Issuer will replace the account bank or find a guarantor with the minimum DBRS rating of “A” who will guarantee unconditionally and irrevocably the obligations of the treasury account agreement. The downgrade provision is consistent with DBRS’s criteria for the initial rating of AAA (sf) assigned to the Class A Notes.

The interest received on the Issuer Account Bank is equal to EONIA minus ten basis points (bps) if EONIA is less than or equal to 0%, and EONIA minus 20 bps if EONIA is positive. As it is possible for negative interest rates to accrue, there is a risk the Issuer will have to pay BNP for depositing cash. To account for potential negative interest rates, DBRS stressed the cash flows in the down interest rate scenario.

The ratings are based upon a review by DBRS of the following analytical considerations:
-- Transaction capital structure and form and sufficiency of available credit enhancement. Credit enhancement to the Class A Notes (38.00%) is provided by subordination of the Class B (10.00%), Class C (4.00%), Class D (3.00%) and the Class E Notes (21.00%). Credit Enhancement to the Class B Notes (28.00%) is provided by subordination of the Class C (4.00%), Class D (3.00%) and the Class E Notes (21.00%). Credit Enhancement to the Class C Notes (24.00%) is provided by subordination of the Class D (3.00%) and the Class E Notes (21.00%). Credit Enhancement to the Class D Notes (21.00%) is provided by subordination of the Class E Notes (21.00%).
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated probability of default, loss given default and expected loss outputs on the mortgage loan portfolio.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C and Class D Notes according to the terms of the transaction documents. The transaction cash flows were modelled using portfolio default rates and loss given default outputs provided by the European RMBS Insight Model. The portfolio was grouped into two sub-portfolios based on historic performance. The sub-portfolios were assigned a Spanish Underwriting Score of 3 and Spanish Underwriting score of 6, respectively. Refer to the presale report for further details. Transaction cash flows were modelled using Intex. DBRS considered additional sensitivity scenario of 0% CPR stress. The Class C Notes and Class D Notes did not pass 0% CPR stress in the down interest rate front loaded default scenario. DBRS will continue to monitor prepayment rates as part its surveillance process.
-- The sovereign rating of the Kingdom of Spain rated A (low)/Stable and R-1 (low)/Stable (as of the date of this report).
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to assign ratings to the above-referenced transaction are “European RMBS Insight Methodology” and “European RMBS Insight: Spanish Addendum.”

DBRS has applied the principal methodologies consistently.

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

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

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

The sources of information used for these ratings include Anticipa and its representatives.

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

DBRS was supplied with one or more third-party assessments. However, this did not impact the rating analysis.

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

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

These ratings concerns a newly issued financial instrument. This is the first DBRS rating action since the initial rating date.

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

In respect of the Class A Notes, a Probability of Default Rate (PDR) of 52.13% and Loss Given Default (LGD) Rate of 53.22%, corresponding to a AAA (sf) rating scenario, were stressed assuming a 25% and 50% increase to the PD and LGD:

-- A hypothetical increase of the base case PDR by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the base case PDR by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to maintaining the ratings on the Class A Notes at AAA (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (low) (sf).
-- A hypothetical increase of the base case PDR by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case PDR by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).
-- A hypothetical increase of the base case PDR by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf).
-- A hypothetical increase of the base case PDR by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (sf).

In respect of the Class B Notes a PDR of 43.40% and LGD Rate of 47.59%, corresponding to an A (sf) rating scenario, were stressed assuming a 25% and 50% increase to the PDR and LGD Rate:

-- A hypothetical increase of the base case PDR by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (high) (sf).
-- A hypothetical increase of the base case PDR by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (low) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (sf).
-- A hypothetical increase of the base case PDR by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (low) (sf).
-- A hypothetical increase of the base case PDR by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (high) (sf).
-- A hypothetical increase of the base case PDR by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (high) (sf).
-- A hypothetical increase of the base case PDR by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (low) (sf).

In respect of the Class C Notes a PDR of 36.58% and LGD Rate of 43.14%, corresponding to a BBB (sf) rating scenario, were stressed assuming a 25% and 50% increase to the PDR and LGD Rate:

-- A hypothetical increase of the base case PDR by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (low) (sf).
-- A hypothetical increase of the base case PDR by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (low) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (high) (sf).
-- A hypothetical increase of the base case PDR by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (sf).
-- A hypothetical increase of the base case PDR by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to B (high) (sf).
-- A hypothetical increase of the base case PDR by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to B (high) (sf).
-- A hypothetical increase of the base case PDR by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to below B (sf).

In respect of the Class D Notes a PDR of 28.35% and LGD Rate of 40.86%, corresponding to a BB (sf) rating scenario, were stressed assuming a 25% and 50% increase to the PD and LGD Rate:

-- A hypothetical increase of the base case PDR by 25%, ceteris paribus, would lead to maintaining the rating of the Class D Notes at BB (sf).
-- A hypothetical increase of the base case PDR by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to maintaining the rating of the Class D Notes at BB (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (high) (sf).
-- A hypothetical increase of the base case PDR by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (high) (sf).
-- A hypothetical increase of the base case PDR by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to below B (sf).
-- A hypothetical increase of the base case PDR by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to below B (sf).
-- A hypothetical increase of the base case PDR by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to below B (sf).

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) 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.

Lead Analyst: Asim Zaman, Assistant Vice President
Rating Date: 05 April 2017
Rating Committee Chair: Erin Stafford, Managing Director

Initial Rating Date: 17 March 2017

Lead Surveillance Analyst: Andrew Lynch, Assistant Vice President

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- European RMBS Insight Methodology (17 May 2016)
-- European RMBS Insight: Spanish Addendum (17 May 2016)
-- Legal Criteria for European Structured Finance Transactions (14 September 2016)
-- Unified Interest Rate Model for European Securitisations (2 November 2016)
-- Operational Risk Assessment for European Structured Finance Servicers (14 October 2016)
-- Operational Risk Assessment for European Structured Finance Originators (14 October 2016)

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