Rating action

The rating actions are as follows:

Series A (ISIN ES0305567002), EUR 2,350,000,000: rated AAA_SF

Series B (ISIN ES0305567010), EUR 150,000,000: rated BBB-_SF

The latest information on the ratings, including the new issue ratings report and related methodologies, is available on this LINK.

Transaction overview

BBVA RMBS 20 FT is a EUR 2,500m static cash securitisation consisting of prime residential mortgage loans originated and serviced by Banco Bilbao Vizcaya Argentaria SA (BBVA) and extended to individual borrowers to finance properties in Spain.

The securitised portfolio consists of first-lien mortgages extended to borrowers’ resident in Spain. The current pool’s balance as of 14 June 2021 is EUR 2,499.8m with no material obligor concentration. Mortgage loans in the current portfolio were originated between 2001 and 2021, with 86.7% originated from 2017 onwards. The portfolio has a seasoning of 2.5 years and a weighted average remaining time to maturity of 24.9 years.

The current portfolio is subject to certain credit-positive eligibility restrictions, such as the exclusion of mortgages that are more than 30 days in arrears, under an active moratorium, restructured or delinquent. The mortgage loans have generally been used to purchase finished houses and have a low weighted average loan-to-value of 69.1% relative to the Spanish market.

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 closed on 14 June 2021 and has its legal final maturity on 14 February 2065.

Rating rationale

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 an amortising 5% cash reserve, fully funded at closing. The Series A and B notes will amortise sequentially and the structure benefits from an interest rate swap with BBVA, which shields the notes from interest rate risk, covers liability costs and provides 1% 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. The historic credit performance of the amortising mortgages is good, reflecting the generally prime status of mortgage borrowers in the portfolio, prudent post-financial crisis origination standards, the generally benign macroeconomic environment in the recent past and supportive measures introduced by the government and banks to prevent mortgage defaults during the Covid-19 pandemic.

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

Credit enhancement (positive)¹. The subordination, cash reserve and excess spread from the interest rate swap provide significant levels of credit enhancement to protect both the senior and the junior notes from losses in the underlying portfolio.

Portfolio characteristics (positive)^1,2,3. The current loan-to-value ratio (69.1%) and debt-to-income ratio (24.0%) are lower than the Spanish average. All underlying mortgaged assets are owner-occupied. The young portfolio (2.5 years of seasoning) mainly reflects the prudent post-financial crisis origination standards in Spain, while the remaining term of 24.9 years reflects the standard 30-year Spanish mortgage contract. The top four regions (Catalonia, Andalusia, Madrid and Valencia), accounting for 69.1% of the portfolio, are among Spain’s wealthiest and represent the natural footprint of BBVA’s mortgage origination business.

Positive portfolio selection (positive)¹. All loans are first-lien mortgages granted to individuals to purchase their main residence. Loans that were previously restructured or are under an active moratorium have been excluded from the securitised portfolio. In addition, none of the loans are currently in arrears.

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 senior costs, the Series A and B interest costs and a 1% excess spread, based on the non-defaulted balance of the assets. In remote scenarios of significant asset defaults, the funds from BBVA may be insufficient to cover the senior interest.

Simple structure (positive)¹. The transaction is static and the notes will amortise fully sequentially. In addition, the subordination of the Series B interest adds to the Series A notes’ protection.

Benign origination period (negative)^1,2,3. The portfolio was predominantly originated under post-financial crisis origination criteria, which have not been tested in a period of significant mortgage borrower stress. Scope’s analysis reflects this with a relatively high volatility assumption related to the expected performance that Scope derived from the originator’s vintage data.
Scope’s assumptions considered BBVA’s rather conservative positioning in the Spanish mortgage market and the more prudent market-wide origination standards after the financial crisis, as indicated by the Bank of Spain.

Liquidity risk (negative)¹. All sources of liquidity in the transaction are exposed to the credit quality of BBVA. This risk is partially mitigated by the high credit quality of the bank and the fact that a limited amount of periodic collections is already sufficient to pay the senior costs and Series A notes’ interest.

The positioning of the cash reserve replenishment before the payment of the Series B notes’ interest exposes the tranche to the risk of non-timely payment of interest, even in relatively benign default rate scenarios. The excess spread from the swap partially mitigates this risk and Scope considered the impact of this transaction structural element in its analysis.

Counterparty concentration (negative)¹. BBVA performs all counterparty roles in the transaction. A default of the bank without prior replacement would be highly likely to result in a default on the transaction. The high credit quality of BBVA partially mitigates this risk. 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.

Upside rating-change drivers

Stabilisation of Spanish macroeconomic conditions with a return to the pre-pandemic norm.

Downside rating-change drivers

A significant deterioration in BBVA’s credit profile may adversely impact the ratings.

Spanish macroeconomic uncertainty in relation to the global slowdown. Covid-19 may weigh negatively on collateral pool performance, as higher unemployment 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 weighted average life. Scope derived an expected portfolio default rate distribution based on 2013-20 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 is 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 39.0% for Series A, and 54.6% for Series B. Scope received historical performance data on recoveries, 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. Back-loaded default scenarios are less severe owing to credit enhancement build-up and the effect of seasoning on the portfolio.

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 (10%) and low (0%) prepayment assumption.

Sensitivity analysis

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, zero notches; sensitivity to the recovery rate, zero notches;
   
• Series B: sensitivity to default rate, zero notches; sensitivity to the recovery rate, zero notches.

Rating driver references
1. Internal information and documents of the issuer, originator and arranger
2. Scope takes no action on the Kingdom of Spain
3. Sovereign Outlook 2021

Stress testing
Stress testing was performed by applying Credit-Rating-adjusted recovery rate assumptions.

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 default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for these Credit Ratings, (Scope’s General Structured Finance Rating Methodology, 14 December 2020; Methodology for Counterparty Risk in Structured Finance, 8 July 2020) are available on https://www.scoperatings.com/#!methodology/list.
The model used for these Credit Ratings is (Scope Cash Flow SF EL Model Version 1.1), available in Scope Ratings’ list of models, published under: https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
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-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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-scale. 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://www.scoperatings.com/#!methodology/list.

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 Ratings: 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 had 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.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin, Germany, Tel +49-30-2789-0. The Credit Ratings are UK-endorsed.
Lead analyst: Sebastian Dietzsch, Director.
Person responsible for approval of the Credit Ratings: Olivier Toutain, Executive Director.
The preliminary Credit Ratings were first released by Scope Ratings on 10 June 2021.The final Credit Ratings were first released by Scope Ratings on 15 June 2021.

Potential conflicts
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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