Press Release

DBRS Morningstar Finalises Provisional Rating on Cajamar Caja Rural S.C.C. Covered Bonds (Cédulas Territoriales - Public Sector)

Covered Bonds

March 28, 2023

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional rating of AA (low) on the new series of covered bonds issued by Cajamar Caja Rural, Sociedad Cooperativa de Crédito (Cajamar or the Issuer) under the Cajamar Public Sector Covered Bonds (Cédulas Territoriales or CT) programme (the Programme). This series is the only outstanding CT (Cedulas Territoriales - ES0422714180) under the Programme, and is a EUR 750 million fixed-rate bond with a coupon of 3.55%. The bond matures on 17 March 2029 and has an extension period of 12 months.

The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (low), which is one notch above Cajamar’s Long-Term Issuer Rating. Cajamar is the Issuer of and Reference Entity (RE) for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of “Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A (low), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of “A”.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 36% to which DBRS Morningstar gives credit, which is the OC level considered to be sustainable based on information from the Issuer. The minimum level of OC observed over the past 12 months was 162% in February 2023.
-- 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 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 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 bonds (CB) ratings.

In addition, all else unchanged, the CT ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below A (low); (2) the sovereign rating on the Kingdom of Spain was downgraded; (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 CT and the 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 to the cash flows deriving from the mortgage credits and loans in the CP as well as 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 CP.
(3) CB issuers shall designate an independent party to monitor the CP (CP monitor), which needs to be approved by the regulator (the Bank of Spain). The CP monitor, whose requirements are very broad and detailed, will apprise the Bank of Spain on a frequent basis.
(4) The CP 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.
(5) All the outstanding CBs under the Programme have an extension period of 12 months (i.e., soft-bullet). DBRS Morningstar’s assessment of such structure is credit positive because, if an issuer is unable to meet payments on the CBs, extension periods reduce the stress on the potential liquidation of the CP to meet upcoming maturities on the CBs.

The total outstanding amount of the CT under the Programme is EUR 750 million. The provisional portfolio as of February 2023 amounted to EUR 1,964 million. This results in a provisional OC of 162%. The minimum legal OC level for CT is 5.0%.

As of December 2022, the CP comprised public-sector assets amounting to EUR 1,996 million and was concentrated (100% of the CP) in Spain, the domicile sovereign. The RE is also located in Spain, the host sovereign. In DBRS Morningstar’s view, this exposes CB investors to an increased risk that the creditworthiness of the RE and the CP may deteriorate at the same time. According to DBRS Morningstar’s “Rating and Monitoring Covered Bonds” methodology, in these circumstances, DBRS Morningstar considers that the CB rating is unlikely to be more than three notches higher than the rating on the host sovereign.

As is customary in the Spanish market, Cajamar CTs do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (54.1% floating rate linked to different indexes and resets) and the interest paid to the CB holders (100% fixed rate). This risk is mitigated by the OC available and accounted for in DBRS Morningstar´s cash flow analysis.

There is a maturity mismatch between the principal payments of the CT and the amortisation profile of the CP assets. However, unlike in most CB programmes, assets’ weighted-average life (3.1 years as per DBRS Morningstar’s calculation) is shorter than that of the liabilities (6.0 years). This asset-liability mismatch is mitigated by the available OC and 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 Cajamar 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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating and Monitoring Covered Bonds” (22 April 2022);
https://www.dbrsmorningstar.com/research/395642/rating-and-monitoring-covered-bonds.

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

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/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 this rating include loan-by-loan data on the CP as at 31 December 2022 containing, among others, information provided by the Issuer on the initial amount of the loan, residual amount, maturity date, amortisation type, underlying debtor, country of the debtor, guarantor, country of the guarantor, and interest rate type.

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 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.

This rating concerns a newly financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

This is the first rating action since the Initial Rating Date.

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. 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: Tomas Rodriguez-Vigil Junco, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 17 March 2023

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
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.

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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