Rating Action Commentary
ֳ Takes Rating Actions on 3 Hipocat RMBS Transactions
Fri 14 Feb, 2025 - 4:49 AM ET
ֳ - Madrid - 14 Feb 2025: ֳ has taken multiple rating actions on three Hipocat Spanish RMBS transactions, including upgrading three tranches. At the same time, ֳ has resolved the Under Criteria Observation (UCO) status of all tranches.
A full list of rating actions is below.
Transaction Summary
The RMBS transactions are Spanish residential mortgage securitisations serviced by Banco Bilbao Vizcaya Argentaria, S.A. (BBB+/Positive/F2).
KEY RATING DRIVERS
European RMBS Rating Criteria Updated: The rating actions reflect the update of ֳ's European RMBS Rating Criteria on 30 October 2024. This update adopted a non-indexed current loan-to-value (LTV) approach to derive the base foreclosure frequency (FF) on portfolios, instead of the original LTV approach applied previously. The rating actions also take into account the borrower-level recovery rate cap of 85% under the new criteria, versus 100% previously. For more information see "ֳ Updates European RMBS Rating Criteria; Sets FF and HPD Assumptions".
When calibrating the portfolio FF rates, ֳ has applied a transaction adjustment of 1.1x to Hipocat 9 and 1.5x to Hipocat 10 and Hipocat 11, to reflect our general assessment of the pools based on their historical performance data.
Stable Asset Performance Outlook: The rating actions reflect the transactions' broadly stable asset performance, in line with our neutral outlook for eurozone RMBS. These transactions maintain a low share of loans in arrears over 90 days (at or below 1.5% of outstanding pool balance as of the latest reporting dates), have ample seasoning of the securitised portfolios of more than 19 years, and carry a weighted average non-indexed CLTV of less than 40% as of the latest reporting date.
Sufficient Credit Enhancement (CE) ֳ views CE protection as sufficient to fully compensate for the credit and cash flow stresses at the respective notes' ratings, which underpins the upgrades on Hipocat 9 class D notes, as well as Hipocat 10 and Hipocat 11 class B notes. We expect structural CE to continue increasing, driven by the mandatory sequential amortisation of the notes. On the other hand, the zero or negative CE protection on all three deals' most junior tranches as well as Hipocat 10 and Hipocat 11 class C notes underlines the distressed ratings of these notes.
Portfolio Risky Attributes: All the portfolios are highly concentrated in the region of Catalonia, with exposures ranging around 70% of the pool balances. To address regional concentration risk, ֳ applied higher rating multiples to the base FF assumption to the portion of the portfolios that exceeds 2.5x the population within this region relative to the national total, in line with its European RMBS Rating Criteria.
Ratings Capped (ESG Consideration): The maximum achievable rating for the three transactions remains at 'AA+sf'. This is due to unmitigated payment interruption risk in a servicer distress in light of insufficient liquidity protection, which is not compatible with 'AAAsf' ratings under ֳ's Counterparty Criteria.
Moreover, the rating of Hipocat 9 class D notes is capped at and linked to the transaction account bank (TAB) provider, Societe Generale, 'A' deposit rating (A-/Stable/F1) as the transaction's cash reserves held at this entity represent the only source of structural CE for the notes. The sudden loss of these funds would imply a model-implied downgrade of 10 or more notches in accordance with ֳ's criteria.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Long-term asset performance deterioration, such as increased delinquencies or larger defaults, which could be driven by changes to macroeconomic conditions, interest-rate increases or borrower behaviour, could lead to downgrades. For instance, a combination of increased defaults and decreased recoveries by 15% each could trigger downgrades of up to four notches
- For Hipocat 9 class D notes, a downgrade of the TAB provider´s deposit rating as the notes are capped by excessive counterparty risk exposure
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- For Hipocat 9, Hipocat 10 and Hipocat 11, increasing liquidity protection sufficient to fully mitigate payment interruption risk could lead to an upgrade of the senior notes to 'AAAsf'
- Stable to improved asset performance driven by stable delinquencies and defaults would lead to increasing CE and, potentially, upgrades. For instance, a combination of decreased defaults and increased recoveries by 15% each could trigger upgrades of up to two notches across the notes
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' 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, and together with any assumptions referred to above, ֳ'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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Hipocat 9 class D notes ratings are directly linked to their TAB's long-term deposit rating, due to excessive counterparty dependence.
ESG Considerations
Hipocat 9, 10 and 11 have an Environmental, Social and Governance (ESG) Relevance Score of 5 for Transaction & Collateral Structure, due to unmitigated payment interruption risk at the 'AAAsf' rating case. This has a negative impact on the credit profile, and is highly relevant to the ratings, resulting in lower ratings of at least one notch.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
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, UK Endorsed |
| Hipocat 11, FTA | EU Issued, UK Endorsed |
| Hipocat 9, FTA | EU Issued, UK Endorsed |