TEXT-S&P rates BBVA's mortgage covered bonds 'A-'
OVERVIEW -- We are assigning our 'A-' rating to Banco Bilbao Vizcaya Argentaria S.A.'s (BBVA) mortgage covered bonds. The outlook is negative. -- The ratings incorporate the maximum possible uplift under our covered bond criteria, in line with BBVA's current overcollateralization levels. -- The negative outlook reflects the fact that any negative rating action on the bank would, all else being equal, lead us to lower the covered bond ratings by the same number of notches. Nov 21 - tandard & Poor's Ratings Services today assigned its 'A-' long-term credit rating to the mortgage covered bonds ("cedulas hipotecarias") issued by Banco Bilbao Vizcaya Argentaria S.A. (BBVA; BBB-/Negative/A-3). The outlook is negative (see list below). The covered bonds are senior secured debt issued by BBVA. To assign the rating, we applied our 2009 covered bond criteria (see "Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds" published on Dec. 16, 2009). Under our criteria for rating covered bonds, we evaluate the maximum potential rating on a covered bond program as the bank's issuer credit rating (ICR) plus the maximum number of notches of ratings uplift. The maximum number of notches of uplift results from our assessment and classification of the program's asset-liability mismatch (ALMM) risk and the program categorization. When determining the program categorization, we consider primarily our view of the jurisdiction of a program and its ability to access external financing or monetize the cover pool. We then assign the covered bonds to one of three distinct categories. Under our criteria, to achieve the maximum potential number of notches of uplift, the available credit enhancement needs to be commensurate with the target credit enhancement. Following our analysis, and given our view of the Spanish legal framework, we have categorized BBVA's mortgage covered bonds in category "1" and determined a "low" ALMM classification. Under our criteria, these combinations enable us to assign to the covered bonds a maximum potential ratings uplift of seven notches above our long-term ICR on BBVA. Based on our criteria and the application of our credit and cash flow stresses from the latest information we received from the issuer, we have assessed that the overcollateralization available to support BBVA's cedulas hipotecarias is commensurate with a three notch ratings uplift above the 'BBB-' ICR on BBVA. Therefore, we have assigned our 'A-' long-term rating to BBVA's mortgage covered bonds. At the same time, we have assigned a negative outlook to the 'A-' rating on these covered bonds. This reflects the fact that, all other things remaining equal, any rating action on BBVA would automatically lead to a corresponding rating action on its covered bonds. Our ratings on BBVA's mortgage covered bonds follow our analysis of the issuer's asset as of Aug. 31, 2012, and liability information to date. We assess the cover pool's credit risk as per our "Criteria for Rating Spanish Residential Mortgage-Backed Securities," published on March 1, 2002, "Methodology And Assumptions: Update To The Cash Flow Criteria For European RMBS Transactions," published on Jan. 6, 2009, "Principles Of Credit Ratings," published on Feb. 16, 2011, and "Covered Bond Ratings Framework: Methodology And Assumptions," published June 26, 2012. We evaluate cash flows generated by the cover pool, and the cash flow required to service outstanding covered bonds under severe economic conditions. This evaluation aims to determine whether the assets in the cover pool are sufficient to meet the payments on the covered bonds in a timely manner. Our cash flow analysis assesses the cover pool's performance by considering: -- Credit risk (as described in the paragraphs below); -- Interest rate and currency risk; -- ALMM risk resulting from cash flow mismatches between assets and liabilities in terms of maturity, and from market value mismatches if the program has to liquidate assets; -- Prepayment risk and servicing costs; and -- An appropriate stress-testing of these risks, using our cash flow model (Imake). In our modeling, we use cash flow assumptions as per our general cash flow criteria ("Cash Flow Criteria for European RMBS Transactions," published on Nov. 20, 2003, and "Methodology And Assumptions: Update To The Cash Flow Criteria For European RMBS Transactions" published on Jan. 6, 2009), because we consider these also apply to covered bonds, due to the similar cash flow risk nature of residential mortgage-backed securities (RMBS) and covered bonds. The ratings on the covered bonds reflect our expectation of timely payment of interest and ultimate repayment of principal by the final maturity date of the covered bonds. As of Aug. 31, 2012, the key characteristics of the combined residential mortgage books of the three entities were: Classification of ALMM mismatch Low Program categorization 1 Maximum potential rating* AA- Maximum rating, given current overcollateralization level A- Current available credit enhancement (%) 53.24 Target credit enhancement commensurate with the highest credit rating (%) 60.58 Note: we calculate the current credit enhancement as assets /liabilities. *Limited by "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions." LIABILITIES MATURITY PROFILE Year Percentage of covered bonds outstanding (%) 2013 12.96 2014 12.73 2015 7.10 2016 8.79 2017 10.13 2018 6.11 2019 3.75 2020 3.83 2021 2.85 2022 3.74 2023 7.48 2024 3.26 2025 3.74 2026 4.67 2027 3.74 TOTAL 100.00 Currently BBVA has outstanding mortgage covered bonds for EUR53.4 billion, with a weighted-average life of 6.52 years and the highest maturity concentration taking place in 2013 (15.80% of the outstanding notes). MORTGAGE BOOK CHARACTERISTICS Residential Mortgage Loan Book Principal balance (EUR) 65,575,143,054 Total number of loans 783,188 Average loan size (EUR) 96,271 Weighted-average LTV ratio (%) 58.80 Weighted-average seasoning (months) 58.52 Weighted-average term to maturity (months) 258 Floating-rate loans (%) 96.82 Weighted-average margin (bps) 104 LTV--Loan-to-value. Nonresidential Mortgage Loan Book Principal balance (EUR) 16,394,148,781 Total number of loans 48,098 Average loan size (EUR) 201,563 Weighted-average LTV ratio (%) 43.74 Weighted-average seasoning (months) 44.32 Weighted-average term to maturity (months) 120 Floating-rate loans (%) 84.62 Weighted-average margin (bps) 150 LTV--Loan-to-value. The above characteristics are based on the information as provided by the issuer and the principal balances we incorporate in our analysis. We include developers in the nonresidential analysis and give no credit to land. We consider the available credit enhancement to be 53.24%. MORTGAGE LOAN BOOK GEOGRAPHIC DISTRIBUTION (%) Andalucia 18.64 Aragon 1.87 Asturias 1.58 Balearic Islands 2.98 Basque Country 3.69 Canary Islands 5.52 Cantabria 0.93 Castilla-La Mancha 3.31 Castilla-Leon 3.83 Catalonia 18.37 Extremadura 1.62 Galicia 4.40 La Rioja 0.52 Madrid 17.51 Murcia 2.18 Navarra 0.65 Valencia 11.81 Others 0.62 Although BBVA operates throughout Spain, the highest concentrations are in Madrid, Andalucia, and Catalonia, which are regions with higher demographic density and where BBVA has been more active. We assessed the likelihood that the borrowers would default on their mortgage payments (the foreclosure frequency), and the amount of loss on the subsequent sale of the property (the loss severity, expressed as a percentage of the outstanding loan). We determined the total mortgage balance that we assume will default, and the total amount of this defaulted balance that is not recovered for the entire residential book, by calculating the weighted-average foreclosure frequency (WAFF) and the weighted-average loss severity (WALS). The product of the WAFF and WALS is the net loss that we assume may affect the portfolio in a 'AAA' scenario. At the 'AAA' level, the WAFF and WALS results were: Weighted Average WAFF and Weighted Average WALS: WAFF (%) 38.89 WALS (%) 41.67 Assumed net credit loss (WAFF x WALS) (%) 16.21 Our assessment indicated that this combination of factors, along with the appraisal of other risk factors, is commensurate with a 'A-' rating on BBVA's cedulas hipotecarias. RELATED CRITERIA AND RESEARCH -- Covered Bond Ratings Framework: Methodology And Assumptions, June 26, 2012 -- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012 -- Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions, May 31, 2012 -- Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised Methodology And Assumptions For Target Asset Spreads, April 24, 2012 -- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 -- Principles Of Credit Ratings, Feb. 16, 2011 -- Methodology: Credit Stability Criteria, May 3, 2010 -- Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds, Dec. 16, 2009 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Update To The Cash Flow Criteria For European RMBS Transactions, Jan. 6, 2009 -- Update to The Criteria For Rating Spanish Residential Mortgage Backed Securities, Jan. 6, 2009 -- European Legal Criteria For Structured Finance Transactions, Aug. 28, 2008 -- Cash Flow Criteria For European RMBS Transactions, Nov. 20, 2003 -- Criteria For Rating Spanish Residential Mortgage-Backed Securities, March 1, 2002 RATINGS LIST Rating Program/ Country: Covered bond type RATINGS ASSIGNED; NEGATIVE OUTLOOK Banco Bilbao Vizcaya Argentaria S.A. A-/Negative Spain: Mortgage Covered Bonds ("Cedulas Hipotecarias")