Rating Action Commentary
ֳ Takes Multiple Actions on 3 Hipocat RMBS
Thu 20 Aug, 2020 - 12:04 PM ET
ֳ - Madrid - 20 Aug 2020: ֳ has taken multiple rating actions on three Hipocat RMBS in Spain, including the removal from Rating Watch Negative (RWN) of two tranches and the upgrade of one tranche. A full list of rating actions is below.
Transaction Summary
The transactions consist of mortgages serviced by Banco Bilbao Vizcaya Argentaria, S.A. (BBVA; BBB+/Stable/F2).
KEY RATING DRIVERS
COVID-19 Additional Stresses
In its analysis of the transactions, ֳ has applied additional stresses in conjunction with its European RMBS Rating Criteria in response to the coronavirus outbreak and the recent legislative developments in Catalonia. ֳ anticipates a generalised weakening of the Spanish borrowers´ ability to keep up with mortgage payments due to a spike in unemployment and vulnerable self-employed borrowers.
Performance indicators such as the levels of arrears (currently ranging between 0.2% and 0.7% for the three transactions) could increase in the following months, leading ֳ to incorporate a 10% increase in the weighted average foreclosure frequency (WAFF) of the portfolios (See: EMEA RMBS: Criteria Assumptions Updated due to Impact of the Coronavirus Pandemic and Spain RMBS: Criteria Assumptions Updated Due to Decree Law in Catalonia at ).
As outlined in "ֳ Coronavirus Scenarios: Baseline and Downside Cases", we also consider a downside coronavirus scenario for sensitivity purposes whereby a more severe and prolonged period of stress is assumed. Under this scenario, ֳ's analysis accommodates a further 15% increase to the portfolio WAFF and a 15% decrease to WA recovery rates.
Credit Enhancement (CE) Trajectory
The affirmation and RWN resolution of Hipocat 9 class C and Hipocat 11 class A2 reflects our view that CE ratios are sufficient to mitigate the risks associated with our base case coronavirus scenario. The upgrade of Hipocat 9 class D to 'B-sf' is also explained by the improved structural CE trajectory, as it has increased to 8.2% as of July 2020 versus 0% two years ago, which is sufficient to mitigate our base case and downside coronavirus stresses.
The Negative Outlook on Hipocat 11 class A2 reflects rating vulnerability to downside risk over the longer-term, driven by a larger-than-average share of self-employed borrowers (about 17% of portfolio balance), who are particularly exposed to the pandemic given their income volatility.
Payment Interruption Risk Present
ֳ views the three transactions as being exposed to payment interruption risk in the event of a servicer disruption, as in scenarios of economic stress we expect the available reserve funds (partially funded for Hipocat 9 and fully depleted for Hipocat 10 and Hipocat 11) to be insufficient to cover senior fees, net swap payments and senior notes' interest during the minimum three months needed to implement alternative servicing arrangements. The notes' maximum achievable ratings are commensurate with the 'Asf' category, in line with ֳ's Structured Finance and Covered Bonds Counterparty Rating Criteria.
Interest Deferability Caps Ratings
Hipocat 10 and Hipocat 11 class B and C notes have a maximum achievable rating of 'BB+sf', reflecting the non-reversible interest deferability on the notes as the volume of gross cumulative defaults has exceeded the documented thresholds in the past. This is consistent with the principles of ֳ's Global Structured Finance Rating Criteria.
ESG Considerations
Hipocat 9 and Hipocat 10 each has an Environmental, Social and Governance (ESG) Relevance Score of '5' for Transaction & Collateral Structure due to payment interruption risk, which has a negative impact on the credit profile, and is highly relevant to the ratings, resulting in a downward adjustment of the ratings by at least one notch.
Hipocat 11 has an ESG Relevance Score of '4' for Transaction & Collateral Structure due to payment interruption risk, which has a negative impact on the credit profile, and is highly relevant to the rating in combination with other factors.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Increase in CE as the transactions deleverage to fully compensate the credit losses and cash flow stresses that are commensurate with higher rating scenarios, all else being equal.
For Hipocat 9 class A notes, improved liquidity protection against a servicer disruption event. This is because the ratings are capped at 'A+sf' driven by an unmitigated payment interruption risk.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A longer-than-expected coronavirus crisis that erodes macroeconomic fundamentals and the mortgage market in Spain beyond ֳ's current base case. CE cannot fully compensate the credit losses and cash flow stresses associated with the current rating scenarios, all else being equal. To approximate this scenario, a rating sensitivity has been conducted by increasing default rates by 15% and cutting recovery expectations by 15%, which would imply downgrades of one category for some of the notes.
A worse-than-expected performance from self-employed borrowers if the coronavirus pandemic materialises in further job losses and more income volatility.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by, ֳ in relation to this rating action.
DATA ADEQUACY
ֳ has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. ֳ has not reviewed the results of any third- party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.
ֳ did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and ֳ is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.
Overall, ֳ's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Because the latest loan-by-loan portfolio data sourced from the European Data Warehouse did not include information about "maximum balance" of the loans that permit further drawdowns, ֳ assumed each loan to exercise the full drawdown capability up to the permitted maximum equivalent to the 80% original loan-to-value ratio. ֳ views credit enhancement protection for the rated notes as sufficient to compensate this risk.
ESG Considerations
Hipocat 9 and Hipocat 10 each has an ESG Relevance Score of '5' for Transaction & Collateral Structure
Hipocat 11 has an ESG Relevance Score of '4' for Transaction & Collateral Structure
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
Applicable Criteria
Applicable Models
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Additional Disclosures
Endorsement Status
| Hipocat 10, FTA | EU Issued |
| Hipocat 11, FTA | EU Issued |
| Hipocat 9, FTA | EU Issued |