DBRS Confirms AA Ratings on Banco Sabadell S.A. Covered Bonds (Cédulas Hipotecarias - Mortgages)

DBRS Ratings Limited (DBRS) confirmed its AA ratings on the Cédulas Hipotecarias (CH; the Spanish Mortgage Covered Bonds), which are outstanding under the Banco Sabadell S.A. Covered Bonds (Cédulas Hipotecarias - Mortgages) programme (Sabadell CH or the Programme). The confirmation follows the completion of a full review of the ratings.

Concurrently, DBRS has discontinued the ratings from CH ES0413860075, which matured on 20 June 2017, and CH ES0413860166, which matured on 31 July 2017.

There are currently 52 outstanding CH series in the Programme, with a nominal amount of EUR 22.93 billion. DBRS currently rates 30 series in the Programme with an aggregate nominal amount of EUR 18.00 billion.

The ratings reflect the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of “A,” being the Long-Term Critical Obligations Rating of Banco Sabadell. Banco Sabadell is the Issuer and Reference Entity for the Programme. --- DBRS classifies Spain as a jurisdiction in which covered bonds are a particularly important funding instrument and deems the cover pool strategic for the core activity of the Issuer.
-- A legal and structuring framework (LSF) assessment of Average associated with Banco Sabadell CH.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (high). In DBRS’s view, the CH’s LSF-L is limited to one notch above the CBAP.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 98% to which DBRS gives credit, being the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.85.

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 (CP).

Everything else being 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 covered bond ratings. In addition, everything else being equal, the CH ratings would be downgraded if any of the following were to occur: (1) the CPCA was downgraded below BBB (low); (2) the sovereign rating of the Kingdom of Spain was downgraded below A (low); (3) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (4) the relative amortisation profile of the CH and CP moved adversely; or (5) volatility in the financial markets were to cause the currently estimated market value spreads to increase.

The total outstanding amount of CH is currently EUR 22.93 billion, while the aggregate balance of the mortgages in the CP is EUR 49.42 billion (as of 30 June 2017), resulting in a total OC of 116%. The eligible CP stands at EUR 35.13 billion, resulting in an eligible OC of 53%.

As of June 2017, the cover pool comprised 467,343 mortgage loans with a 62% residential, 25% commercial, 10% developers and 3% land loan split and a weighted-average current unindexed loan-to-value ratio of 57%. It is geographically diversified, with higher concentrations in the Catalonia region (34.4%) and Community of Valencia (18.2%). Approximately 0.3% of the pool was originated in a currency other than euros. The pool is 82 months seasoned.

The majority of the loans in the cover pool (approximately 79%) are floating rate, while 45% of the liabilities pay a fixed coupon. As is 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 about ten years, while that of the covered bonds is about 3.5 years. This generates an asset-liability mismatch that is partly mitigated by the available OC.

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

For further information on the Programme, please refer to the rating report that is available on www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is “Rating European Covered Bonds.”

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

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 the 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 data and information used for these ratings include historical default performance data and stratification tables on the cover pool provided by the Issuer.

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

At the time of the initial rating, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

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

The last rating action on this transaction took place on 26 April 2017, when DBRS assigned a rating of AA to CH I/2017 (ISIN ES0413860596).

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

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 and US regulations only.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 3 September 2013

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

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Critical Obligations Rating Criteria
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- European RMBS Insight Methodology
-- European RMBS Insight Methodology: Spanish Addendum
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating CLOs and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
-- The Effect of Sovereign Risk on Securitisations in the Euro Area

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.