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In This List

Spanish Covered Bond Market Insights 2020


Servicer Evaluation: TaxServ LLC

Take Notes: 2020 European Structured Finance Conference Recap: Where Do We Go From Here


Global Covered Bond Characteristics And Rating Summary Q3 2020


DECO 2019-RAM U.K. CMBS Ratings Lowered Following Review

Spanish Covered Bond Market Insights 2020

In its Covered Bond Market Insights reports, S&P Global Ratings presents the local covered bond market, explains how the relevant legal framework works, provides an overview on the domestic mortgage market, compares key characteristics of the existing programs, and presents the results of a scenario analysis. In this report, we review the Spanish covered bond market.

Overview: Time To Adapt To European Regulation

The Spanish mortgage covered bond market is one of the largest in the world, with outstanding issuance totaling €231 billion in 2019. Although covered bonds had existed since the late nineteenth century, the first covered bond law in Spain, regulating mortgage covered bonds, was introduced in 1981, while in 2002 Spain introduced legislation for public sector covered bonds.

Today, the Spanish covered bond market includes mortgage-backed covered bonds ("cédulas hipotecarias"; CHs), public sector debt-backed covered bonds ("cédulas territoriales"; CTs), and multicédulas (repackages of cédulas).

Chart 1


Chart 2


Implementation of European covered bond framework

Following the publication of the harmonization directive and regulation in the EU Official Journal on Dec. 18, 2019, national authorities have 18 months to transpose the directive into their national legislation and an additional 12 months to apply the new rules. We expect that Spanish authorities will have considerable work to do. They will have to, among other things, define the liquidity and overcollateralization requirements, and establish a covered bond register and a cover pool monitor.

Recent rating actions have been positive

We took several positive rating actions on Spanish covered bond programs in 2019. Following the update of our rating above the sovereign criteria (see "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published Jan. 30, 2019), which now allow up to four notches (compared to three previously) of uplift above the sovereign rating for Spanish mortgage covered bonds, we raised the rating on three programs to 'AA' from 'AA-'. Further, during the year, several issuers made a public statement to maintain a minimum level of overcollateralization commensurate with the maximum potential notches of collateral-based uplift. This, together with the upgrade of the Kingdom of Spain to 'A' from 'A-' in September 2019 (see related research), resulted in additional positive rating actions on three issuers.

Eurozone monetary stance will stay loose

In a low-growth environment, the European Central Bank (ECB) will maintain a dovish stance, especially as fiscal policy remains close to neutral. We expect the ECB to lower its deposit rate by another 10 basis points in March 2020 if economic data deteriorate further, and we think it won't be able to raise rates until 2022 (see "European Economic Snapshots: Weak External Demand Weighs On Economic Growth", published Dec. 16, 2019).

The recent restart of the ECB's targeted longer-term refinancing operations (the so-called TLTRO III) could dampen covered bond issuance, given the attractive terms of this central bank borrowing as a funding source (see "Global Financing Conditions: Bond Issuance Is Up 13.5% After Strong October Totals," published Dec. 13, 2019).

The Legal Framework: Change Is On The Horizon

Legal framework

Spanish covered bonds (CHs and CTs) are legislation-enabled. The two main relevant legislations are "Ley 2/1981" on mortgage covered bonds and "Ley 44/2002" on public sector covered bonds.

Bondholders have recourse to the issuing bank, which is responsible for full and timely payments as long as it is not in default, and to the entire un-securitized asset book (mortgages for CHs and public sector assets for CTs) if the issuer becomes insolvent.

Chart 3


Maturity mismatch between assets and liabilities is not covered structurally because the law does not contemplate the existence of liquidity lines, and covered bonds are all issued with hard-bullet maturities. Similarly, programs are exposed to interest rate risk because most covered bonds carry a fixed interest rate, while the collateral pays a floating rate, with only a small percentage of fixed-rate loans. Because the programs do not benefit from a swap linked to the covered bonds, we stress this risk in our cash flow analysis.

Table 1  |  View Expanded Table

Legal Framework Comparison
Spain Spain Portugal France - SFH France - SCF Italy
Product Cédulas Hipotecarias (CH) Cedulas Terrioriales (CTs) Mortgage CB (Obrigações Hipotecárias) Obligations à l'Habitat (OH) Obligations Foncières (OF) Obbligazioni Bancarie Garantite (OBG)
Legislation Law 2/1981, and modefied by Law 41/2007 and RD 716/2009 Law 44/2002 Decreto-Lei n. 59/2006, Primary Legislation and Secondary Legislation Article L. 515-34 and seq. of the French Monetary and Financial Code The articles L.513-2 to L.513-27 and R.513-1 and seq. of the French Monetary and Financial Code Bank of Italy Supervisory Regulations and Regulation of Bank of Italy on Covered Bonds
Issuer Universal credit institution, specialized credit institution Universal credit institution, specialized credit institution Universal credit institution, specialized credit institution Specialized credit institution Specialized credit institution Universal credit institution
Owner of the cover assets Issuer Issuer Issuer Credit institution (pledged to the issuer and transferred upon trigger event) Issuer or credit institution (pledged to the issuer and transferred upon trigger event) SPE, which guarantees the covered bonds
Cover asset type Mortgage loans Public sector loans Mortgage loans, securitizations Mortgage loans, securitizations Public sector loans, mortgage loans, securitizations, credit institutions Public sector loans, mortgage loans, securitizations
Mortgage cover asset location EEA EEA EEA EEA (currently domestic only) EEA EEA
Residential mortgage cover assets LTV limit Residential: 80%, commercial: 60% N/A Residential: 80%; commercial: 60% 80% Residential: 80%; state-guaranteed loans: 100% Residential: 80%; commercial: 60%
Primary method for mitigating market risk Natural hedging for floating issuances Natural hedging for floating issuances Derivatives "Natural" hedging stress testing Derivatives Derivatives
Mandatory overcollateralization 25% nominal 43% nominal 5.26% nominal 5% nominal 5% nominal Assets at least equal liabilities nominal and NPV basis
Note: This table can be expanded on to view aditional jurisdictions in one combined table. The data can also be exported to Microsoft Excel. SPE--Special-purpose entity. EEA--European Economic Area. NPV--Net present value. LTV--Loan to value. N/A--Not applicable. Sources: European Covered Bond Council, S&P Global Ratings.
Alignment with the EU's harmonized covered bond framework

The legislative package approved by the European Parliament in 2019 provides a common definition of covered bonds, defines the product's structural features, and clarifies the responsibilities for supervision of the product. It also amends the EU's Capital Requirements Regulation (CRR) with the aim of tightening the conditions for granting preferential capital treatment (see "Harmonization Accomplished: A New European Covered Bond Framework," published April 18, 2019).

We believe the changes required to align the Spanish legislation with the directive are generally supportive for covered bonds because they introduce higher standards for asset quality, disclosure, and supervision. The requirement for 180-day liquidity coverage is a credit positive because this will lower the amount of refinancing costs that we stress in our cash flow analysis. Similarly, the establishment of a cover pool register and the introduction of hedging agreements may partially mitigate interest or foreign exchange risks, which we would otherwise stress in our analysis. We expect that the amended legislation will remove the current provision that the entire mortgage book must be pledged in favor of noteholders. Although we do not expect this provision to have an immediate negative impact on our ratings, we note that a hard limit on the amount of overcollateralization that issuers are able to pledge could limit the collateral-based uplift in some instances.

At this stage, due to the political uncertainties in Spain over the last year, a proposal is not yet in place. We will closely monitor any proposals and discussions that take place during the following months.

Table 2

Spanish Covered Bond Programs--Overview
Program Long-term issuer credit rating Covered bond rating Outstanding covered bonds (mil. €) Program type Collateral type Link to surveillance report Link to transaction update
Abanca Corporación Bancaria S.A. BB+/Positive/-- AA+/Stable/-- 2,483 Hard bullet 81.19% Residential/18.81% Commercial Abanca S.A. TU Abanca
Banco Bilbao Vizcaya Argentaria S.A. A-/Negative/A-2 AA+/Negative/- 30,166 Hard bullet 83.39% Residential/16.61% Commercial BBVA S.A. TU BBVA
Bankia S.A. BBB/Stable/-- AA/Stable/-- 24,708 Hard bullet 88.57% Residential/11.43% Commercial Bankia S.A. TU Bankia
Bankinter S.A. BBB+/Stable/A-2 AA+/Stable/-- 11,750 Hard bullet 75.13% Residential/24.87% Commercial Bankinter S.A. TU Bankinter
CaixaBank S.A. BBB+/Stable/A-2 AA/Stable/-- 49,940 Hard bullet 77.38% Residential/22.62% Commercial CaixaBank S.A. TU CaixaBank
Cajamar Caja Rural, S.C.C. NR/NR/NR AA/Stable/-- 5,250 Hard bullet 74.36% Residential/25.64% Commercial Cajamar Caja Rural, S.C.C. TU Cajamar
Ibercaja Banco S.A. BB+/Stable/B AA/Stable/-- 6,147 Hard bullet 86.28% Residential/13.72% Commercial Ibercaja Banco S.A. TU Ibercaja
Kutxabank S.A. BBB/Positive/A-2 AA+/Stable/-- 2,952 Hard bullet 91.95% Residential/8.05% Commercial Kutxabank S.A. TU Kutxabank

Mortgage Market Overview: Growth Is Decelerating But Remains Above The Eurozone

Spain keeps growing but at a slower pace

The Spanish economy grew by 0.4% over the third quarter of 2019, the same rate as in the second quarter. Domestic demand was the main engine of growth, while net exports were a drag on economic growth. On the back of domestic demand, imports increased by 1.2% over the quarter compared with 0.5% in the second quarter. Survey indicators pointed to a weaker start in the last quarter of the year. Both the manufacturing and services purchasing managers' index posted below third-quarter levels. This trend is underlined by a decline of both producer and consumer confidence at the start of the quarter. Data available so far point to the same direction--industrial production and retail sales started the quarter below September levels.

We expect that growth in the Spanish economy will decelerate to 1.7% in 2020, from 2.0% in 2019 and 2.4 in 2018, and will drop further to 1.6% in 2021 (see table 3). A no-deal Brexit and more protectionist trade policies remain key risks for the Spanish economy.

Table 3

Economic Indicators
Year Real GDP growth (%) Unemployment rate (%) HPI change (%)
2018 2.4 15.3 6.7
2019f 2.0 14.0 5.5
2020f 1.7 13.2 4.4
2021f 1.6 12.7 3.9
2022f 1.6 12.3 3.3
Source: S&P Global Ratings. f--Forecast. HPI--House price index.

Chart 4


Consumer confidence continues to support the housing market

House prices increased by an annual 4.7% in the third quarter of 2019, albeit lower than in 2018 (7.2%) and in 2017 (6.6%). The unemployment rate is on a reducing trend, employment growth is solid, and consumer confidence continues to support the housing market. Low mortgage rates helped further. Meanwhile, transactions continued to increase, but at a much lower rate. In the 12 months to May, they were up 5.3%, compared with 15.8% for the same month in 2018. This shows that the oversupply in housing is disappearing and the housing market is becoming tighter. Important regional disparities persist: a square meter in Madrid costs more than three times that in Extremadura, a region that still posted negative house-price growth in first quarter. This compares to more than 8% annual growth in the capital's region or 6% in Catalonia (see "Europe's Housing Markets Lose Speed As The Economy Weakens," Sept. 24, 2019).

Chart 5


Chart 6


Transposition of the EU's Mortgage Credit Directive

Spanish Law 5/2019, approved on March 15, 2019, transposes the requirements from the EU's Mortgage Credit Directive 2014/17/UE, passed on Feb. 4, 2014. Like the directive, this law aims to improve borrower protection. It includes provisions that aim to increase the borrower's legal protection, improve transparency and clarity within the mortgage agreements, and create a fair equilibrium between the parties involved.

The law specifically applies to all individuals involved in the constitution of mortgage contracts in Spain. The scope extends and regulates certain aspects of mortgage contracts including:

  • Increasing the information provided to the borrower prior to signing the contract;
  • Limiting penalty fees applied by financial entities relating to certain events, such as prepayments, unpaid amounts, or floating-rate to fixed-rate interest novations; and
  • Regulating the timing for starting foreclosure procedures.
Spanish cover pool

Although the Spanish legislation includes a legal framework for both CHs and CTs, currently the covered bond market mainly includes CHs, which represent around 90% of the total outstanding covered bonds.

The Spanish mortgage market is characterized by amortizing floating-rate mortgages with maturities up to 30 years and loan-to-value ratios around 70% on average at origination. Since 2017, we have observed an increased interest in mortgages with an initial fixed interest period, which has been mainly due to issuers offering more attractive fixed rates because of the current interest rate environment. In 2019, more than 30% of new mortgage originations had a fixed period over 10 years compared to less than 1% in 2014.

The homeownership rate in Spain is around 76%, above other Western European countries (66% on average) and lower than in most Eastern and Southern European economies (81% on average). We expect Spain's residential mortgage market to stay stable at around its current level in the medium term.

Over the past several years, we have seen a positive evolution of arrears, defaults, and restructured loans, due to Spanish banks' ongoing efforts to reduce their stock of legacy nonperforming loans.

At the same time, economic growth over the past six years has supported the reduction of arrears and defaults in Spanish banks' mortgage books.

Table 4  |  View Expanded Table

Spanish Covered Bond Programs--Key Characteristics
Program Outstanding assets (mil. €) No. of loans WA LTV (%)* WA seasoning (months) Interest rate type Repayment type WAFF (%) WALS (%)
Abanca Corporación Bancaria S.A. 15,744 193,981 65.00 94.5 Fixed (3.9%), floating (96.1%) Amortizing (77.7%); interest-only (4%); other (18.3%) 31.7 42.3
Banco Bilbao Vizcaya Argentaria S.A. 64,757 935,581 73.74 108.6 Fixed (17.99%), floating (82.01%) Amortizing (99.83%); interest-only (0.17%) 25.4 36.4
Bankia S.A. 67,736 848,523 58.61 112.7 Fixed (7.97%), floating (92.03%) Amortizing (99.6%); interest-only (0.4%) 28.3 39.5
Bankinter S.A. 26,154 208,757 53.74 82.0 Fixed (9.84%), floating (90.16%) Amortizing (99.63%); interest-only (0.37%) 21.7 33.9
CaixaBank S.A. 88,188 1,178,640 52.33 101.0 Fixed (21.1%), floating (78.9%) Amortizing (99.9%); interest-only (0.1%) 28.1 36.6
Cajamar S.A. 14,085 173,077 55.46 95.2 Fixed (4%), floating (96%) Amortizing (96.9%); interest-only (3.1%) 28.5 34.4
Ibercaja S.A. 19,802 271,433 59.87 98.5 Fixed (9.9%), floating (90.1%) Amortizing (98.9%); interest-only (0.5%) 20.5 37.2
Kutxabank S.A. 23,435 237874 58.13 96.8 Fixed (17.6%), floating (82.4%) Amortizing (98.8%); interest-only (1.2%) 20.53 34.88
Note: This table can be expanded on to view all of the data presented in tables 2, 4, and 5 in one combined table. The data can also be exported to Microsoft Excel. O/C--Overcollateralization. N/A--Not applicable. *As reported by the issuer in the September 2019 HTT report.

Chart 7


Ratings Outlook: High Overcollateralization Levels And Unused Notches Support Stable Ratings

The chart below shows the current ratings on Spanish covered bond programs. Note that we do not include Cajamar Caja Rural because S&P Global Ratings does not have a public rating on the issuer.

Three of the programs that are rated 'AA+' have published a commitment to maintain the level of overcollateralization commensurate with the maximum level of collateral-based uplift--that is, four notches above the jurisdictional supported rating level (JRL). For programs that do not have this commitment, the maximum collateral-based uplift is three notches.

Chart 8


Currently, the sovereign cap is 'AA+' (four notches above the rating on Spain), which is the maximum rating we can assign to a Spanish covered bond as of this report's publication date. The current outlook for the rating on Spain is stable, which, combined with positive or stable rating outlooks on most of the issuers, and the fact that half of the programs we rate have unused notches of support, underpin the stability of the ratings on most of the programs we rate.

As shown in table 5, available credit enhancement is significantly higher than target credit enhancement for the majority of the programs that we rate. The target credit enhancement is the overcollateralization required to achieve the maximum potential collateral-based uplift. It covers asset default risk, or credit risk, and market value risk, which is the credit enhancement that we expect to be required to refinance the cover pool in a stressed environment.

Table 5  |  View Expanded Table

Spanish Covered Bond Programs--Credit Enhancement
Program Available credit enhancement reported (%)* Target credit enhancement (%) 'AAA' credit risk (%) O/C consistent with the current rating (%) Unused notches
Abanca Corporación Bancaria S.A. 534.00 45.91 38.01 45.91 0
Banco Bilbao Vizcaya Argentaria S.A. 115.00 35.77 18.19 35.77 0
Bankia S.A. 174.10 41.59 31.55 41.59 2
Bankinter S.A. 122.59 31.06 12.89 31.06 3
CaixaBank S.A. 77.00 30.47 21.53 30.47 3
Cajamar S.A. 168.30 51.08 17.51 51.08 W/H
Ibercaja S.A. 222.00 38.50 21.32 38.50 0
Kutxabank S.A. 693.8 46.01 18.08 46.01 2
Note: This table can be expanded on to view all of the data presented in tables 2, 4, and 5 in one combined table. The data can also be exported to Microsoft Excel. O/C--Overcollateralization. N/A--Not applicable. *Reported by the issuer as of Sept. 30, 2019.

Chart 9


Chart 9 shows our average cash flow calculations across countries. Spanish programs on average have relatively high credit and market risks and significantly higher available credit enhancement. This is because we assess Spanish programs' credit quality relatively conservatively given that the majority of Spanish issuers only provide stratified cover pool information rather than loan-by-loan data, which issuers provide in other jurisdictions.

Scenario Analysis: Overcollateralization Levels Could Withstand Significant House-Price Decreases

Despite a currently strong economy, we have carried out a scenario analysis with large drops in residential house prices to gauge whether these would affect the final rating outcome or the overcollateralization commensurate with the current ratings on the covered bonds. We have decided to test this scenario analysis at 20% and 35% declines because house prices dropped by an average of 20% and a maximum of 31% during the financial crisis between 2008 and 2013.

Table 6 shows the impact of the house-price decline on our WALS calculation for our rated programs. The overcollateralization commensurate with the current rating would not increase significantly. Additionally, these hypothetical house-price drops would not decrease the maximum achievable rating on any of the programs. This is due the higher weight of refinancing risk in the overall results compared to the weight of credit risk.

Table 6

Effect Of House Price Decline On Rated Spanish Covered Bond Programs
Abanca Corporacion Bancaria S.A. Banco Bilbao Vizcaya Argentaria S.A. Bankia S.A. Bankinter S.A. CaixaBank S.A. Cajamar Caja Rural S.C.C. Ibercaja Banco S.A. Kutxabank S.A.
House price haircut
Base case
WALS (%) 38.17 31.33 38.68 31.07 28.53 31.33 33.29 32.93
AAA credit risk (%) 38.01 18.19 31.55 12.89 21.53 17.51 21.32 18.08
Target credit enhancement (%) 45.91 35.77 41.59 31.06 30.47 51.08 38.5 46.01
Overcollateralization commensurate with current rating (%) 45.91 35.77 41.59 31.06 30.47 51.08 38.5 46.01
WALS (%) 45.3 40.23 46.04 39.33 35.99 40.64 42.99 40.23
AAA credit risk (%) 39.59 20.51 33.31 13.55 22.34 19.44 22.52 19.55
Target credit enhancement (%) 48.54 38.54 44.1 31.95 31.45 53.65 40.61 47.48
Overcollateralization commensurate with current rating (%) 48.54 38.54 44.1 31.95 31.45 53.65 40.61 47.48
WALS (%) 50.76 45.49 50.72 44.5 41.61 46.11 48.12 45.54
AAA credit risk (%) 41.7 21.66 35.07 14.44 23.81 20.72 23.43 20.29
Target credit enhancement (%) 50.65 40.16 45.86 33.06 32.75 55.36 41.82 48.95
Overcollateralization commensurate with current rating (%) 50.65 40.16 45.86 33.06 32.75 55.36 41.82 48.95

Related Criteria

  • Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan.30, 2019
  • Methodology And Assumptions: Assessing Pools Of European Residential Loans, Aug. 4, 2017
  • Methodology And Assumptions: Analyzing European Commercial Real Estate Collateral In European Covered Bonds, March 31, 2015
  • Covered Bond Ratings Framework: Methodology and Assumptions, June 30, 2015
  • Covered Bonds Criteria, Dec. 9, 2014

Related Research

  • European Economic Snapshots: Weak External Demand Weighs On Economic Growth, Dec. 16, 2019
  • Global Covered Bond Characteristics And Rating Summary Q4 2019, Dec. 12, 2019
  • Global Covered Bond Insights Q4 2019, Dec. 12, 2019
  • Global Outlook: Covered Bond Harmonization Set To Raise The Bar In 2020, Nov. 26, 2019
  • BBVA's Mortgage Covered Bond Program Ratings Raised Following Similar Action On Spain; Outlook Negative, Oct. 4, 2019
  • Abanca's Mortgage Covered Bond Program Ratings Raised Following Similar Action On Spain; Outlook Stable, Oct. 4, 2019
  • Bankia's Mortgage Covered Bond Program Ratings Raised Following Similar Action On Spain; Outlook Stable, Oct. 4, 2019
  • Kutxabank's Mortgage Covered Bond Program Ratings Raised Following Similar Action On Spain; Outlook Stable, Oct. 4, 2019
  • Ibercaja's Mortgage Covered Bond Program Ratings Raised Following Similar Action On Spain; Outlook Stable, Oct. 4, 2019
  • Spain Ratings Raised To 'A/A-1' From 'A-/A-2' On Economic Resilience; Outlook Stable, Sept. 20, 2019
  • Ratings Raised On Cajamar Caja Rural's Spanish Mortgage Covered Bond Program; Outlook Stable, June 6, 2019
  • Harmonization Accomplished: A New European Covered Bond Framework, April 18, 2019
  • Ratings Raised On BBVA's Mortgage Covered Bond Program Following Revised Criteria; Outlook Positive, March 19, 2019
  • Ratings Raised On Bankinter's Spanish Mortgage Covered Bond Program Following Revised Criteria; Outlook Stable, March 19, 2019
  • Ratings Raised On CaixaBank's Mortgage Covered Bond Program Following Revised Criteria; Outlook Stable, March 19, 2019
  • Ratings Raised On Abanca's Spanish Mortgage Covered Bond Program; Outlook Positive, March 18, 2019
  • Glossary Of Covered Bond Terms, April 27, 2018
  • S&P Global Ratings Comments On The Proposed Directive For European Covered Bonds, March 29, 2018

This report does not constitute a rating action.

Primary Credit Analyst:Ana Galdo, Madrid (34) 91-389-6947;
Secondary Contacts:Maria Luisa Gomez Grande, Madrid (34) 91-788-7208;
Antonio Farina, Madrid (34) 91-788-7226;

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