DBRS Ratings GmbH (DBRS) finalised the provisional rating of A (high) (sf) of the bond issued by Fondo de Titulización Structured Covered Bonds UCI (UCI SCB), backed by Unión de Créditos Inmobiliarios SA EFC Cédulas Hipotecarias (UCI CH). The special-purpose vehicle (SPV or the Issuer) was established in July 2019 under Spanish law to issue up to EUR 1.5 billion of bonds.
The inaugural issuance UCI CB 2019-01 (ES0305439004) is a EUR 500 million fixed-rate bond paying an annual coupon of 0.125% and maturing on 15 October 2024. The rating of the SPV bond addresses the ultimate payment of interest and principal on or before the fund legal maturity date.
The transaction was analysed considering DBRS’s “Rating and Monitoring Covered Bonds” methodology. However, DBRS materially deviated from this methodology because the transaction structure (the repackaging of a covered bond) is not specifically referenced in the methodology. DBRS’s rating to some extent “flows through” the private rating of the repackaged UCI CH with additional structured finance considerations that are reflected in the “sf” suffix.
The transaction is a repackaging of UCI CH which takes place in the form of a fund under Spanish law. At the closing of the transaction, the Issuer used the proceeds of the UCI SCB to fund the purchase of UCI CH, a EUR 500 million fixed-rate CH paying an annual coupon of 0.15% maturing on 15 October 2024. In addition, UCI provides a separate credit facility to the Issuer in order to pay expenses and fund an interest reserve and an enforcement reserve. Both reserves are deposited in the cash account on the issuance date. Santander SA is the bank account and paying agent counterparty for this transaction.
The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (low), which is UCI’s Long-Term Issuer Rating. UCI is the Issuer and Reference Entity (RE) of the UCI CH.
-- A Legal and Structuring Framework (LSF) Assessment of “Average” associated with the transaction.
-- A Cover Pool Credit Assessment (CPCA) of “A”, which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (high).
-- The private DBRS rating assigned to the UCI CH.
-- No notches of uplift for recovery prospects due to the transaction structure.
-- A level of overcollateralisation (OC) of 698% to which DBRS gives credit, which is the post-issuance level adjusted by a scaling factor of 0.90.
The transaction structure 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 two-notch downgrade of the LSF-L, resulting in a two-notch downgrade of the UCI SCB rating. In addition, all else unchanged, the UCI SCB rating would be downgraded if any of the following occurred: (1) the CPCA was downgraded below “A”; (2) the sovereign rating of the Kingdom of Spain was downgraded below A (low); (3) the LSF Assessment associated with the transaction was downgraded; (4) the relative amortisation profile of the UCI CH and CP moved adversely; or (5) volatility in the financial markets caused the currently estimated market value spreads to increase.
UCI is a “Establecimiento Financiero de Crédito” operating as a mortgage lender in Spain and regulated by the Bank of Spain. However, UCI is not a deposit-taking institution and, in DBRS´s view, in case of adverse performance, UCI would be liquidated rather than be subject to resolution under the Bank Recovery and Resolution Directive. As such, UCI does not have a Critical Obligations Rating and the CBAP is equalised with the Long-Term Issuer Rating of A (low).
DBRS associated an LSF Assessment of “Average” with the transaction, which is in line with the LSF Assessment of Spanish CH programmes. The “Average” LSF Assessment associated with the transaction reflects DBRS’s view that (1) there is a satisfactory level of segregation provided by the CH legal framework and the CH holders’ first-priority right on the entire mortgage book of the Issuer, in combination with a residual commingling risk that DBRS considers limited; (2) there is an absence of specific provisions and uncertainty surrounding the timely liquidation of the CP to meet maturing CH in an assumed insolvency of the Issuer as well as a lack of any short-term liquidity support, balanced by DBRS’s expectation of forthcoming regulator’s support and an ability to support the CB instrument in line with a Host Sovereign rated “A” with a Stable trend by DBRS; (3) the role of the Bank of Spain in the supervision of the Spanish CH, which oversees the banking business and the CH business of the Issuer as a sole entity, combined with the absence of contingency plans specific to the continuation of the CH, high penetration of the CH as a funding tool for Spanish banks and a history of regulatory intervention in the re-arrestment of financial institutions during the last years, which in DBRS’s view, benefit CH holders because of the structural nature of Spanish CH.
DBRS has assessed the LSF related to the transaction as “Average” according to its “Rating and Monitoring Covered Bonds” methodology. For more information, please refer to DBRS’s “DBRS Assigns Legal and Structuring Framework Assessment to Spanish Mortgage Covered Bonds Programmes” and “Spanish Mortgage Covered Bonds: Legal and Structuring Framework Review” commentaries, both available at www.dbrs.com.
At the fund level, the structure benefits from asset segregation in line with Spanish structured finance transactions. The interest reserve covers one year of interest payments on the UCI SCB and can only be drawn in the event that UCI fails to transfer to the fund sufficient amounts to pay interest due on the UCI SCB. The maturity on the UCI SCB matches the UCI CH maturity. Frequency of payments on the coupons is also matched and a spread is built-in to cover fund expenses in the event of UCI default, while the UCI CH are still performing. Should the UCI CH fail to repay principal timely, the Issuer’s management company should cross-accelerate all UCI CHs and start enforcement proceedings against UCI. The structure allows only for four years from this point to collect proceeds from enforcement of the UCI CH, which in DBRS´s view may not be sufficient to ensure the full redemption of the UCI SCB. Therefore, the rating of the UCI SCB does not incorporate any recovery notching above the LSF-L.
The total outstanding amount of UCI CH is EUR 500 million, while the aggregate balance of the mortgages in the CP was EUR 4.38 billion (as of June 2019), resulting in a total OC of 776%. The eligible CP stands at EUR 2.39 billion, resulting in an eligible OC of 379%.
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 32,931 mortgages with a weighted-average current unindexed loan-to-value ratio of 76.5%. It is geographically distributed mainly in the Spanish regions of Andalusia (24% by loan amount), Catalonia (21%) and Madrid (20%). The pool is 110 months seasoned. All loans have been originated in euros.
As is customary in the Spanish market, the UCI CH holders do not receive the benefit of any swap contract to hedge the mismatches between the interest yield by the CP (82.7% floating rates are linked to different indexes and resets) and the interest due on the CH (100% pay fixed rates). The interest rate risk on the CH is partially covered by the high level of OC available. The DBRS-calculated weighted-average life of the assets is roughly 13 years while that of the covered bonds is five years. This generates an asset-liability mismatch that is partly mitigated by the available OC. All assets and liabilities are denominated in euros and there is no currency mismatch.
The rating assigned to the UCI SCB materially deviates from DBRS’s “Rating and Monitoring Covered Bonds” methodology. DBRS considers a material deviation from a rating methodology when there may be a substantial likelihood that a reasonable investor or other user of the credit rating(s) would consider the material deviation to be a significant factor in evaluation the rating(s). In the case of the UCI SCB, the transaction structure, as outlined above, is not specifically referenced in the “Rating and Monitoring Covered Bonds” methodology.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is: “Rating and Monitoring Covered Bonds”.
DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
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 the rating includes CP stratification tables and historical default data 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.
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.
This is the first rating action since the Initial Rating Date. The last rating action on Fondo de Titulización Structured Covered Bonds UCI took place on 25 July 2019, when DBRS assigned a provisional rating to the inaugural issuance UCI CB 2019-01 (ES0305439004).
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: 25 July 2019
DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
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:
-- Rating and Monitoring Covered Bonds
-- Rating and Monitoring 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 firstname.lastname@example.org.