DBRS Ratings GmbH (DBRS Morningstar) assigned AAA ratings to the Cédulas Hipotecarias (CH or Spanish Mortgage Covered Bonds) issued under the Kutxabank, S.A. (Kutxabank or the Issuer) Covered Bonds programme (Kutxabank CH or the programme). The three outstanding CH, which total EUR 1.25 billion, have a fixed rate of interest.
The ratings reflect the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A”, reflective of the likelihood that the source of payments will switch from the Reference Entity (RE) to the cover pool (CP). Kutxabank is the Issuer of and RE for the programme. There is no Critical Obligations Rating associated with the RE and DBRS Morningstar classifies Spain as a jurisdiction in which covered bonds are a particularly important funding instrument. The Long-Term Issuer Rating (LTIR) is A (low), and the CBAP is set at one notch above the LTIR.
-- A Legal and Structuring Framework (LSF) Assessment of “Strong” associated with the programme.
-- 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 AA.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 41.1% to which DBRS Morningstar gives credit, which is the minimum level observed in the past 12 months adjusted by a scaling factor of 0.85.
-- The sovereign rating on the Kingdom of Spain, rated ‘A’ with a Stable trend by DBRS Morningstar, as of the date of this press release.
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 one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the CB ratings. In addition, all else unchanged, the CH ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below “A”; (2) the sovereign rating on the Kingdom of Spain was downgraded below A (low); (3) the LSF assessment associated with the programme was 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 moved adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.
The Strong LSF Assessment associated with this CB programme reflects DBRS Morningstar’s view of the following:
(1) DBRS Morningstar understands that the legislation currently in place gives CB holders a preferential right on the cash flows derived from the mortgage credits and loans in the CP, as well as those cash flows deriving from the liquidity buffer, and substitute assets and derivative instruments in the CP, if any.
(2) The insolvency judge or the Fund for the Orderly Restructuring of the Banking Sector, in case of the Issuer's insolvency or resolution, respectively, will appoint a special administrator to manage the CB programme. This special administrator will be separate from the general insolvency administrator and will ensure that the rights and interests of the CB holders are preserved. Moreover, the special administrator will have wide powers to attempt a refinancing of the cover pool (CP).
(3) CB issuers shall designate an independent party to monitor the CP (cover pool monitor), which needs to be approved by the regulator (the Bank of Spain). The cover pool monitor, whose requirements are very broad and detailed, will apprise the Bank of Spain on a frequent basis.
(4) The cover pool shall include at all times a dynamic liquidity buffer to cover temporary liquidity constraints. This buffer shall cover the net liquidity outflow of the CB programme over the next 180 days. In DBRS Morningstar's view, this provides the CB holders strong protection.
The total outstanding amount of the CH under the programme is EUR 1.25 billion. The portfolio as of end March 2023 amounted to EUR 2.12 billion. This results in an estimated OC of 69.8%. The minimum legal OC level for CH is 5.0%.
Spanish CBs are backed by a specific portfolio of assets selected by the Issuer. As of 31 March 2023, the CP mainly comprised residential mortgage loans (93.4%), with the remaining part of the portfolio (6.6%) corresponding to liquid assets to cover the net liquidity outflow of the CB programme over the next 180 days. The mortgage pool is relatively geographically diversified, with higher concentrations in Basque Country (44.5%), Madrid (26.9%), and Catalonia (12.4%). The CP has a weighted-average (WA) seasoning of 60 months and a WA remaining term of 259 months. No loans are in arrears.
As is customary in the Spanish market, CH do not benefit from hedging agreements to cover the mismatch between the interest paid by the cover pool (46% floating rate linked to different indexes and resets) and the interest paid to the covered bondholders (100% fixed rate). This risk is mitigated by the available overcollateralisation (OC) and has been accounted for in DBRS Morningstar´s cash flow analysis.
There is a maturity mismatch between the principal payments of the CH and the amortisation profile of the cover pool assets, because the loans’ WA life (11.9 years as reported by the Issuer) is longer than that of the liabilities (2.4 years). Moreover, the CH under the programme do not benefit from any maturity extension. This generates an asset-liability mismatch that is mitigated by the available OC and is accounted for in the "Strong" LSF Assessment associated with the programme.
All CP assets and CB are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.
For further information on the programme, please refer to the rating report at www.dbrsmorningstar.com.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on Kutxabank are likely to have an impact on this credit rating.
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://www.dbrsmorningstar.com/research/396929.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Global Methodology for Rating and Monitoring Covered Bonds” (8 May 2023); https://www.dbrsmorningstar.com/research/413651/global-methodology-for-rating-and-monitoring-covered-bonds.
Other methodologies referenced in this transaction are listed at the end of this press release.
DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
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/401817/global-methodology-for-rating-sovereign-governments.
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.
The sources of data and information used for these ratings include CP stratification tables as of 31 March 2023, as provided by the Issuer.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
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.
These ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.
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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Tomas Rodriguez-Vigil Junco, Vice President, Credit Ratings
Rating Committee Chair: Ketan Thaker, Managing Director, Head of European RMBS & Covered Bonds
Initial Rating Date: 5 June 2023
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
-- Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023), https://www.dbrsmorningstar.com/research/413651/global-methodology-for-rating-and-monitoring-covered-bonds.
-- Global Methodology for Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (8 May 2023), https://www.dbrsmorningstar.com/research/413652/global-methodology-for-rating-and-monitoring-covered-bonds-addendum-market-value-spreads.
-- Global Methodology for Rating Banks and Banking Organisations (23 June 2022), https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight model v 184.108.40.206, https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.
-- European RMBS Insight: Spanish Addendum (1 March 2023),
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Global Methodology for Rating Sovereign Governments (29 August 2022), https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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.