DBRS Confirms AAA Rating on Banco Sabadell S.A. Covered Bonds

DBRS Ratings GmbH (DBRS) confirmed its AAA ratings on the Cédulas Hipotecarias (CH or Spanish Covered Bonds) which are outstanding under the Banco Sabadell S.A. Covered Bonds (Cédulas Hipotecarias - Mortgages) programme (Sabadell CH or the Programme).

This rating action follows the upgrade of Banco Sabadell’s Long-Term Issuer Rating to A (low) from BBB (high) with a Positive trend and the upgrade of its Long Term Critical Obligations Ratings (COR) to A (high) from “A” on 4 June 2019.

The Covered Bonds Attachment Point, which is the Long-Term COR of Banco Sabadell, is now A (high) instead of “A”. The lowest Cover Pool Credit Assessment in line with the LSF-Implied Likelihood (LSF-L) is now AA (low) instead of AAA. The AA LSF-L remains unchanged and, therefore, it has no impact on the AAA rating of Banco Sabadell’s outstanding CH rated by DBRS.

At the same time, DBRS discontinued its rating from the following series:
-- Cedulas Hipotecarias - ES0413860174, which matured on 18 September 2018;
-- Cedulas Hipotecarias - ES0413580004, which matured on 30 October 2018;
-- Cedulas Hipotecarias - ES0413860224, which matured on 11 January 2019;
-- Cedulas Hipotecarias - ES0413580020, which matured on 19 January 2019;
-- Cedulas Hipotecarias - ES0413860414, which matured on 29 January 2019; and
-- Cedulas Hipotecarias - ES0413860422, which matured on 23 April 2019

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high), being the Long-Term Critical Obligations Rating of Banco Sabadell. Banco Sabadell is the Issuer and Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) assessment of “Average” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of AA (low), being the lowest CPCA in line with the LSF-implied likelihood (LSF-L).
-- An LSF-L of AA.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 81.7% 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 analysed with the DBRS European Covered Bond Cash Flow tool. 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. This is due to the structure of the LSF matrix in combination with the CPCA, which is now AA (low) instead of AAA. In addition, all else unchanged, the CH ratings would be downgraded if any of the following were to occur: (1) the CPCA was downgraded below AA (low); (2) the sovereign rating of the Kingdom of Spain was downgraded below A (low); (3) the LSF assessment associated with the Programme were downgraded; (4) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (5) the relative amortisation profile of the CH and CP were to move adversely; or (6) volatility in the financial markets were to cause the currently estimated market value spreads to increase.

There are EUR 20.65 billion of CH outstanding under the Programme, of which DBRS rates EUR 11.88 billion, while as of March 2019 the aggregate balance of mortgages in the CP was EUR 43.83 billion. This resulted in a total estimated OC of 112.2%. As of March 2019, the eligible CP stood at EUR 30.38 billion, resulting in an eligible OC of 47.1%.

Spanish covered bonds are backed by the entire mortgage book of the bank, except mortgage loans pledged to securitisations and bonos hipotecarios. As of March 2019, the CP comprised 452,066 mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 61.7%. The pool is composed of residential (64.3%), commercial (25.2%), developer (7.9%) and land (2.6%) loans. It is geographically diversified, with higher concentrations in the Catalonia region (35.3%), Community of Valencia (17%) and Madrid (12.5%). The pool is 83 months seasoned.

As is customary in the Spanish market, the CH holders do not receive the benefit of any swap contract to hedge the mismatches between the interest yield by the CP (69% floating rate linked to different indexes and resets) and the interest due on the CH (46% paying fixed rate and 54% floating rate linked to different indexes and resets). All CH are issued in euros while 0.2% of the loans were originated in a currency other than euros. DBRS considers this exposure to be negligible and to be mitigated by the available OC.

The DBRS-calculated weighted-average life of the assets is roughly nine years while that of the covered bonds is about 2.8 years. This generates an asset-liability mismatch that is mitigated by the available OC.

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

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

Notes:
All figures are in euros unless otherwise noted.

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

In DBRS’s opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the cash flow analysis.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: https://www.dbrs.com/research/333487/rating-sovereign-governments.

The sources of data and information used for these ratings include CP stratification tables provided by the Issuer that allowed DBRS to further assess the portfolio.

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 the 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.

The last rating action on this transaction took place on 4 July 2018, when DBRS upgraded the ratings of Banco Sabadell CH to AAA.

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 GmbH, Sucursal en España are subject to EU and US regulations only.

Lead Analyst: Covadonga Aybar, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 3 September 2013

DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
28006 Madrid
Spain

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- European RMBS Insight Methodology
-- European RMBS Insight: 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 SMEs
-- Rating Sovereign Governments

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.