Scope assigns (P) AAA(SF) to class A of BBVA RMBS 22 FT - Spanish RMBS
The rating actions are as follows:
Series A (ISIN: ES0305689004), EUR 1,358,000,000: rated (P) AAASF
Series B (ISIN: ES0305689012), EUR 42,000,000: rated (P) ASF
Preliminary ratings rely on the information made available to Scope up to 21 November 2022. Scope may assign final ratings subject to the the review of the final version of all transaction documents and legal opinions. Final credit ratings may deviate from preliminary ratings.
The preliminary rating on the Series B notes addresses the ultimate payment of interest and repayment of principal on or before the final maturity date.
BBVA RMBS 22 FT is a EUR 1,400m static cash securitisation consisting of Spanish prime residential mortgage loans originated and serviced by Banco Bilbao Vizcaya Argentaria SA (BBVA).
The securitised portfolio consists of first-lien mortgages extended to borrowers resident in Spain. The preliminary pool’s balance as of 7 September 2022 is EUR 1,516.9m with no material obligor concentration. Mortgage loans in the current portfolio were originated between 2001 and 2022, with 82.0% originated in 2021 or 2022. The portfolio has a weighted average seasoning of 2.5 years and a weighted average remaining term to maturity of 24.5 years. The mortgage loans have predominantly been used to purchase finished houses and have a weighted average current loan-to-value of 71.4%.
BBVA provides all money handling services including the holding of bank accounts, mortgage servicing and interest rate hedging. The rated instruments amortise sequentially and benefit from a fully funded 5% cash reserve, which is amortising. Excess spread is contractually available through an interest rate swap.
The transaction is expected to close on 1 December 2022 and has its legal final maturity on 26 July 2066.
The ratings reflect i) the legal and financial structure of the transaction; ii) the quality of the underlying collateral in the context of the Spanish macroeconomic environment; and iii) the experience and incentives of BBVA as the transaction’s originator and mortgage manager.
Credit enhancement of the rated notes stems from their respective subordination levels as well as the cash reserve. The Series A and B notes will amortise sequentially and the structure benefits from an interest rate swap with BBVA, which protects the notes from interest rate risk and provides 0.65% of excess spread.
The ratings also account for the underlying portfolio’s credit quality considering its expected performance under the current and future macroeconomic conditions in Spain.
BBVA performs all money handling roles in this transaction, including the role of servicer, account bank and interest swap provider. The ratings reflect the counterparty risk exposure to the bank as well as the replacement of the bank in various roles upon the loss of a BBB rating. Scope maintains a non-public credit assessment on BBVA. Europea de Titulización S.G.F.T. (EdT) manages the transaction.
Key rating drivers
Simple structure and credit enhancement (positive)1. The transaction is static and the notes will amortise fully sequentially.The subordination, cash reserve and excess spread from the interest rate swap provide significant credit enhancement to protect both the senior and junior notes from losses in the underlying portfolio.
Portfolio characteristics (positive)1,2. All loans are first-lien mortgages granted to individuals, mostly to purchase their main residence. The portfolio exhibits a decent current loan-to-value ratio (71.4%) and debt-to-income ratio (23.4%). The young portfolio (82.0% originated in 2021 or 2022) reflects the prudent origination standards in Spain, while the remaining term of 24.5 years reflects the standard 30-year Spanish mortgage contract.
Interest rate swap (positive)1. The transaction benefits from an interest rate swap with BBVA, which partially mitigates the asset-liability interest rate mismatch. BBVA will receive all interest collected on the portfolio in exchange for paying an amount equal to the Series A and B interest costs and a 0.65% excess spread, based on the non-delinquent balance of the assets.
Liquidity risk (negative)1. The cash reserve replenishment ranking senior to Series B interest, combined with a relatively thin excess spread, exposes the Series B noteholders to the risk of non-timely interest payments. The potential interest deferrals under certain default rate scenarios constrains the ratings below the AA category.
Counterparty concentration (negative)1. The rating on the Series B notes is constrained by the credit quality of BBVA, as the entire credit enhancement of the notes, i.e. the cash reserve and the excess spread from the interest rate swap, is exposed to the bank. The high credit quality of BBVA and its systemic importance in Spain mitigates this risk.
None of the key rating factors are ESG related.
Upside rating-change drivers
Significantly better performance than expected, e.g. significantly lower defaults or significantly higher recoveries than expected fuelled by strong macroeconomic conditions could lead to an upgrade of the Series B notes.
Downside rating-change drivers
A significant deterioration in BBVA’s credit profile may adversely impact the ratings of Series B.
Spanish macroeconomic uncertainty in relation to the global geopolitical context. The current geopolitical tensions may weigh negatively on collateral pool performance, as a significant slowdown in economic growth may affect the capacity of borrowers to repay.
Quantitative analysis and assumptions
Scope used a cash flow model to analyse the transaction and applied a statistical distribution of defaults when modelling the granular collateral pool. The key assumptions derived were then applied to the cash flow analysis of the transaction over its amortisation period. A mean default rate of 3.0% and a coefficient of variation of 90.0% were applied over the portfolio’s expected life. Scope derived an expected portfolio default rate distribution based on 2013-22 vintage data provided by BBVA and EdT.
The vintage data covers a generally benign period in the context of Spanish mortgage loan performance. To reflect a period of stress, Scope considered the behaviour of mortgage loans in Spain that BBVA originated between 2004 and 2007, which were exposed to the financial crisis in 2008. The mean default rate reflects the originator’s vintage data, accounting for the fact that post-crisis origination criteria are more conservative. However, BBVA’s origination criteria have not been tested in an adverse credit scenario, which Scope’s assumptions reflect with a relatively high default rate coefficient of variation.
Scope applied rating-conditional recovery rates of 45.0% for Series A, and 57.0% for Series B. Scope received historical performance data on recoveries, and in the context of previous BBVA RMBS transactions data incorporating: i) curing; ii) potential restructuring; and iii) repossession. Scope defined the AAA recovery rate assumption considering the dispersion of the vintage data together with the analysis of BBVA’s repossession data. The recovery timing has a vectorised recovery schedule and a weighted average recovery lag of about two years.
Scope derived a front-loaded default timing term structure based on the portfolio’s amortisation schedule.
A cash flow analysis was performed considering the portfolio’s characteristics and the transaction’s main structural features. Scope analysed the transaction within the range of a stressed high (5%) and low (1%) prepayment assumption.
Scope tested the resilience of the ratings to deviations in the main input parameters: the mean default rate and the recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.
The following shows how the results change compared to the assigned ratings in the event of: i) an increase in the mean default rate by 50%; and ii) a reduction in the recovery rate by 50%, respectively:
Series A: sensitivity to default rate, two notches; sensitivity to the recovery rate, two notches;
- Series B: sensitivity to default rate, two notches; sensitivity to the recovery rate, two notches.
Rating driver references
1. Internal information and documents of the issuer, originator and arranger
2. Scope affirms Spain's credit ratings at A- with Stable Outlook
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like defaults and recoveries, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.
Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow SF EL Model Version 1.1 incorporating relevant asset assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.
The methodologies used for these Credit Ratings, (General Structured Finance Rating Methodology, 17 December 2021; Counterparty Risk Methodology, 14 July 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings are (Cash Flow SF EL Model Version 1.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating(s): public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment/asset audit. The external due diligence assessment/asset audit was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Adam Plajner, Associate Director
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
The preliminary Credit Ratings were released by Scope Ratings on 24 November 2022.
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.
Conditions of use / exclusion of liability
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