DBRS Finalises Ratings of TDA Sabadell RMBS 4, Fondo de Titulizacion

DBRS Ratings Limited (DBRS) finalised ratings to the notes issued by TDA SABADELL RMBS 4, Fondo de Titulizacion (the Issuer) as follows:

-- Class A Notes (ES0305299002) rated A (high) (sf)
-- Class B Notes (ES0305299010) rated B (high) (sf)

The rating of the Class A notes addresses timely payment of interest and ultimate payment of principal and the Class B notes addresses ultimate payment of interest and ultimate payment of principal.

The Issuer will be a securitsation of residential mortgage loans secured by first-lien mortgages originated by Banco de Sabadell S.A. (Sabadell or the Seller) in Spain. The Issuer has used the proceeds of the Class A and Class B notes to fund the purchase of the mortgage portfolio from the Seller. In addition, Sabadell has provided separate additional subordinated loans to fund both the initial expenses and the Reserve Fund. The securitisation is in the form of a fund, in accordance with Spanish Securitisation Law.

The securitised mortgage loans were originated by Sabadell. The mortgage loans are secured over residential properties located in Spain. The transaction is managed by Titulización de Activos, Sociedad Gestora de Fondos de Titulización, S.A.

The originator and servicer of the transaction is Sabadell. The Account Bank and the Principal Paying Agent is also Sabadell.

The ratings are based upon a review by DBRS of the following analytical considerations:

-- The transaction’s capital structure, form and available credit enhancement. The Class A Notes benefit from EUR 570 million (9.5%) subordination of the Class B Notes and the EUR 294 million (4.9%) from the Reserve Fund, which is available to cover senior expenses as well as interest and principal of the Class A Notes until paid in full. The Reserve Fund will amortise in line with the Class A and Class B Notes, and becomes available for the Class B Notes once the Class A Notes have been fully amortised. The Reserve Fund will not amortise if certain performance triggers are breached. The Class A Notes’ principal is senior to the Class B Notes’ interest payments in the priority of payments.

-- DBRS was provided with the final portfolio equal to EUR 6.0 billion, as of 28 November 2017. The main characteristics of the total portfolio include: (1) 73.4% weighted-average current loan-to-value (WACLTV) and 96.6% indexed WA CLTV (INE Q4 2015); (2) the top three geographical concentrations of Catalonia (33.5%), Valencia (19.2%), and Madrid (12.3%); (3) 3.7% of the borrowers are non-nationals; (4) weighted-average loan seasoning of 8.1 years; and (5) the weighted-average remaining term of the portfolio is 26.2 years with 28.9% of the portfolio having a remaining term greater than 30 years.

-- 21.3% of the securitised mortgages products benefit from loan margin reduction linked to additional products outstanding at each interest determination date. In addition to these contractual loan features, the transaction documentation allow the servicer to grant loan modifications without consent of the management company within the range of permitted variations. DBRS stressed the margin of the portfolio to the minimum margin allowed per the loan agreement.

-- The loans are floating-rate mortgages primarily linked to 12-month Euribor (77.24%), the IRPH index of mortgage loans (2.11%), others (1.33%) and fixed-for-life loans (19.33%), while the notes are floating-rate liabilities indexed to three-month Euribor. The interest rate risk is covered by a swap contract with Sabadell.

-- The credit quality of the mortgages backing the notes and the ability of the servicer to perform its servicing responsibilities. DBRS was provided with Sabadell’s historical mortgage performance data, as well with loan-level data for the mortgage portfolio. Details of the probability of default (PD), loss given default (LGD), and expected losses (EL) resulting from DBRS’s credit analysis of the mortgage portfolio at A (high) (sf) and B (high) (sf) stress scenarios are detailed below.

-- The transaction’s account bank agreement and respective replacement trigger require Sabadell acting as the treasury account bank to find (1) a replacement account bank or (2) an account bank guarantor upon loss of a BBB Account Bank applicable rating. The DBRS Critical Obligations Rating (COR) of Sabadell is “A”, while the DBRS rating for Sabadell’s Senior Debt is BBB (high). The Account Bank applicable rating is the higher between one notch below Sabadell’s COR or Sabadell’s Senior Debt rating.

-- The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS “Legal Criteria for European Structured Finance Transactions” methodology.

As a result of the analytical considerations, DBRS derived a Base Case PD of 7.97% and LGD of 36.41%, which resulted in an EL of 2.90% using the European RMBS Credit Tool. DBRS cash flow assumptions stress the timing of defaults and recoveries, prepayment speeds and interest rates. Based on a combination of these assumptions, a total of 16 cash flow scenarios were applied to test the capital structure and ratings of the notes. The cash flows were analysed using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to these ratings are:
“European RMBS Insight Methodology” and “European RMBS Insight: Spanish Addendum”.

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

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf

The sources of data and information used for these ratings include Banco de Sabadell, S.A and Titulización de Activos, Sociedad Gestora de Fondos de Titulización, S.A.

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

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

DBRS considers the 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.

These ratings concern a newly issued financial instrument. These are the first DBRS ratings on this financial instrument.

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, the PD of 26.56% and LGD of 51.30%, corresponding to a A(high) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to BBB (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to BBB (low) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to BBB (low) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to BB (sf).

In respect of the Class B notes, the PD of 11.17% and LGD of 41.82%, corresponding to a B (high) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PDR and LGD:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to B (low) (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to B (low) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to B (low) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade below B (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade below B (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade below B (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade below B (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade 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 and US regulations only.

Lead Analyst: Rehanna Sameja, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Rating Date: 1 December 2017

Initial Rating Date: 23 November 2017

DBRS Ratings Limited
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London EC3M 3BY
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Registered in England and Wales: No. 7139960

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

-- European RMBS Insight Methodology
-- European RMBS Insight: Spanish Addendum
-- Legal Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

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