Press Release

DBRS Morningstar Confirms A (high) Rating on Liberbank Cédulas Hipotecarias

Covered Bonds

May 07, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its A (high) rating on the single standalone Cédula Hipotecaria (CH, Spanish mortgage covered bonds) issued by Liberbank S.A. (Liberbank or the Issuer). The confirmation follows the completion of a full review of the rating.

The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB. Liberbank is the Issuer and Reference Entity for the programme. There is no Critical Obligations Rating associated with Liberbank, but DBRS Morningstar considers Spain a jurisdiction for which covered bonds are a particularly important financing tool. As such, the CBAP is set at the level of the Issuer Rating plus one notch.
-- A Legal and Structuring Framework (LSF) Assessment of “Average” associated with Liberbank CH.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), which is the lowest CPCA in line with the LSF-Implied Likelihood.
-- An LSF-Implied Likelihood (LSF-L) of A (low).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 114.5% 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 cover pool (CP).

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch. In addition, everything else being equal, the CH ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below BBB (low); (2) the sovereign rating of the Kingdom of Spain were 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 of the CP were to move adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

The total outstanding amount of CH is currently EUR 6.9 billion. As of December 2020, the aggregate balance of the mortgages in the CP was roughly EUR 17 billion and the CH amounted to EUR 7.1 billion, resulting in a total proforma OC of 138.8%. The eligible CP as of December 2020 stood at EUR 14.8 billion, resulting in an eligible OC of 107.0%.

The CP is split between 86.9% residential and 13.1% non-residential mortgages. The CP comprises 223,874 mortgage loans with a weighted-average (WA) loan-to-value of 58.2%. It is geographically distributed mainly in the Spanish regions of Madrid (26.8%), Castilla-La Mancha (19.3%), and Asturias (12.0%). The pool is 7.2 years seasoned, the underlying loans’ reference rate is primary floating (67.2%) and almost all loans are originated in euros (99.9%).

As is customary in the Spanish market, the CH holders do not receive the benefit of any swap contract to hedge the mismatches between the interest yield by the CP (67.2% floating rate linked to different indexes and resets) and the interest due on the CH (49.0% paying fixed as of 7 May 2021). The interest rate risk is partially mitigated by the high
level of OC available.

The WA remaining term of the cover pool is 19.5 years while that of the covered bonds is around five years. This generates an asset-liability mismatch that is partly mitigated by the available OC.

DBRS Morningstar has assessed the LSF related to Liberbank CH as “Average” according to its rating methodology. For more information, please refer to the DBRS Morningstar commentaries “Spanish Mortgage Covered Bonds: Legal and Structuring Framework Review” and “DBRS Assigns Legal and Structuring Framework Assessment to Spanish Mortgage Covered Bonds Programmes,” available at www.dbrsmorningstar.com.

For further information on Liberbank CH, please refer to the rating report available at www.dbrsmorningstar.com.

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 continue to increase in the coming months for many CPs, some meaningfully. The ratings are based on additional analysis as a result of the global efforts to contain the spread of the coronavirus. In the cover pool analysis of this programme, DBRS Morningstar assumed a moderate decline in residential property prices.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-
update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-tocredit-ratings. The DBRS Morningstar 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 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-exposureroadmap.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS
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/373262.

DBRS Morningstar notes that the above press release was amended on 23 June 2021 to reflect appropriate regulatory disclosures for the Financial Conduct Authority.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating and Monitoring Covered Bonds” (27 April 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the surveillance section of the principal methodology.

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 these transactions 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-forrating-sovereign-governments.

The sources of data and information used for this rating include dynamic default performance data, loan-by-loan data and CP stratification tables as of December 2020 provided by Liberbank 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 initial rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the information available to it for the purposes of providing this 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 programme took place on 7 May 2020, when DBRS Morningstar confirmed its A (high) rating on Liberbank Cédulas Hipotecarias’ single standalone issuance following the annual review of the programme.

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 http://cerep.esma.europa.eu/cerepweb/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Hrishikesh Oturkar, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 11 March 2014

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Geschäftsführer: Detlef Scholz
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The rating methodologies used in the analysis of this transaction can be found at:
https://www.dbrsmorningstar.com/about/methodologies.

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 info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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