DBRS Ratings GmbH (DBRS Morningstar) confirmed its A (high) (sf) rating on the bond issued by Fondo de Titulización Structured Covered Bonds UCI (UCI SCB) and backed by Unión de Créditos Inmobiliarios SA EFC Cédulas Hipotecarias (UCI CH). The confirmation follows the completion of a full review of the Programme. At the same time, DBRS Morningstar discontinued its rating on UCI CB 2019-01 (ES0305439004), which was redeemed early on 27 July 2020. Following the redemption, the Programme was terminated.
At the assignment of the rating, the transaction was analysed applying a material deviation from DBRS Morningstar’s “Rating and Monitoring Covered Bonds” methodology because the transaction structure (the repackaging of a covered bond) was not specifically referenced in the methodology. At the time of this rating action, the “European Structured Finance Flow-Through Ratings” methodology is applicable to the UCI SCB rating as the principal methodology. DBRS Morningstar´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 rating confirmation reflects the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (low), which is Unión de Créditos Inmobiliarios’s (UCI) 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 Morningstar rating of UCI CH.
-- No notches of uplift for recovery prospects of the UCI SCB because of the transaction structure.
-- A level of overcollateralisation (OC) of 706% for the UCI CH to which DBRS Morningstar gives credit, which is the minimum observed OC level during the past 12 months, adjusted by a scaling factor of 0.90.
DBRS Morningstar analysed the transaction with its European Covered Bonds 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 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.
Prior to the discontinuation, the total outstanding amount of UCI CH was EUR 500 million, while the aggregate balance of the mortgages in the CP was EUR 4.53 billion (as of March 2020), resulting in a total OC of 806.6%. The eligible CP stands at EUR 2.77 billion, resulting in an eligible OC of 454.5%.
As of 31 March 2020, the CP was mainly formed by residential mortgage loans (99.7%) and a residual portion of developer loans (0.3%). The CP comprised 34,715 mortgage loans with a weighted-average (WA) current unindexed loan-to-value ratio of 74.4%. It is geographically distributed mainly among the Spanish regions of Andalusia (23.1%), Catalonia (22.5%), and Madrid (20.0%). The pool was 110 months seasoned with a remining term to maturity of 287 months. All mortgages were originated in euros. The interest rate of the underlying loans are floating rate (76.1%) and fixed rate (23.9%).
As is customary in the Spanish market, CH do not receive the benefit of any swap contract to hedge the mismatches between the interest yield by the CP (76.1% floating rate linked to different indexes and resets) and the interest due on the CH (100% fixed). This risk is mitigated by the available OC and has been accounted for in DBRS Morningstar´s cash flow analysis.
The DBRS Morningstar-calculated WA life of the assets is approximately 13 years while that of the covered bonds is approximately four years. This generates an asset-liability mismatch that is mitigated by the available OC and has been accounted for in DBRS Morningstar´s cash flow analysis.
All liabilities are denominated in euros, as are all CP assets; as such, investors are not currently exposed to any foreign exchange risk.
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that payment holidays and delinquencies may arise in the coming months for many cover pools, some meaningfully. The rating is based on additional analysis as a result of the global efforts to contain the spread of the coronavirus.
The DBRS Morningstar Sovereign group released on 16 April 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 22 July 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar’s analysis considered impacts consistent with the moderate scenario in the referenced reports.
On 24 April 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated Covered Bonds in Europe. For more details please see https://www.dbrsmorningstar.com/research/359987/covid-19-the-impact-on-european-covered-bonds and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in euros unless otherwise noted.
The principal methodologies applicable to the ratings are: “Rating and Monitoring Covered Bonds” (27 April 2020) and “European Structured Finance Flow-Through Ratings” (20 January 2020).
DBRS Morningstar has applied the principal methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.
A review of the transaction legal documents was not conducted as the 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 at: https://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for the ratings include CP stratification tables as at 31 March 2020 and static pool default data on UCI residential book from Q1 2001 to Q1 2019, provided by the Issuer.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time the 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 these ratings 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 31 July 2019, when DBRS Morningstar finalised its provisional rating of UCI SCB.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Covadonga Aybar, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 31 July 2019
DBRS Ratings GmbH, Sucursal en España
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Tel. +34 (91) 903 6500
DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
-- Rating and Monitoring Covered Bonds (27 April 2020),
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (27 April 2020),
-- Global Methodology for Rating Banks and Banking Organisations (8 June 2020),
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
-- European RMBS Insight Methodology (2 April 2020) and European RMBS Insight Model v22.214.171.124, https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology.
-- European RMBS Insight: Spanish Addendum (10 July 2019), https://www.dbrsmorningstar.com/research/347838/european-rmbs-insight-spanish-addendum.
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Rating CLOs and CDOs of Large Corporate Credit (21 July 2020),
-- Rating CLOs Backed by Loans to European SMEs (8 July 2019) and DBRS Diversity Model v126.96.36.199, https://www.dbrsmorningstar.com/research/347780/rating-clos-backed-by-loans-to-european-smes.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
-- Global Methodology for Rating Sovereign Governments (27 July 2020), https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.
-- European Structured Finance Flow-Through Ratings (20 January 2020), https://www.dbrsmorningstar.com/research/355713/european-structured-finance-flow-through-ratings-methodology
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.