DBRS Morningstar Assigns AAA Rating to Banco Sabadell S.A. Covered Bonds New Issuance

DBRS Ratings GmbH (DBRS Morningstar) assigned a AAA rating to a new series of covered bonds issued by Banco Sabadell S.A. (Banco Sabadell or the Issuer) under the Banco Sabadell Covered Bonds (Cédulas Hipotecarias or CH) programme (Sabadell CH or the Programme). The new CH (Cedulas Hipotecarias – ES0413860745) is a EUR 1 billion fixed-rate security maturing on 10 February 2028.

The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high), which is Banco Sabadell’s Long-Term Critical Obligations Rating. 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), which is 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 77.4% to which DBRS Morningstar gives credit, which is 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 Morningstar 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 rating. In addition, all else unchanged, the CH rating 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 (rated “A” with a Positive trend by DBRS Morningstar) 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.

The total outstanding amount of CH under the programme after the issuance is EUR 22.43 billion, of which DBRS Morningstar rates EUR 12.68 billion. As of 30 September 2019, the aggregate balance of mortgages in the CP was EUR 42.85 billion, which results in a total estimated OC of 91%. The eligible CP stood at EUR 31.05 billion, resulting in an estimated eligible OC of 38%.

Spanish covered bonds are backed by the entire mortgage book of the bank, except mortgage loans pledged to securitisations and bonos hipotecarios. As of 30 September 2019, the CP comprised 445,293 mortgage loans with a 66.7% residential, 24.7% commercial, 6.2% developers, and 2.4% land loan split and a weighted-average current unindexed loan-to-value ratio of 57%. The CP is geographically diversified across Spain, with the highest concentrations in Catalonia (36.3% by outstanding loan amount) and Community of Valencia (15.8%). Approximately 0.2% of the CP was originated in a currency other than euros. The pool was 81 months seasoned.

As is customary in the Spanish market, CH holders do not receive the benefit of any swap contract to hedge the mismatches between the interest yield by the CP (65.2% floating rate linked to different indexes and resets) and the interest due on the CH (44.3% paying fixed rate and 55.7% floating rate linked to different indexes and resets). This risk is mitigated by the OC available and accounted for in DBRS Morningstar’s cash flow analysis.

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

All CH are issued in euros while 0.2% of the loans were originated in a currency other than euros. DBRS Morningstar considers this exposure to be negligible and to be mitigated by the available OC.

DBRS Morningstar has assessed the LSF related to the Programme as “Average” according to its “Rating and Monitoring Covered Bonds” methodology. For more information, please refer to DBRS Morningstar’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 rating is “Rating and Monitoring Covered Bonds”.

In DBRS Morningstar’s opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, DBRS Morningstar 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 “Global Methodology for Rating Sovereign Governments” methodology at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

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

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

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

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

DBRS Morningstar 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 2 July 2019, when DBRS Morningstar confirmed its ratings on Banco Sabadell CH following the full review of the programme.

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

For further information on DBRS Morningstar 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: Ketan Thaker, 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 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
-- Global Methodology for Rating Sovereign Governments

A description of how DBRS Morningstar 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.