S&P Global Ratings recently completed its review of the affected Spanish residential mortgage-backed securities (RMBS) transactions that it rates following its March 23, 2018 upgrade of Spain. Of the tranches placed on CreditWatch positive, we raised more than 77% of ratings (the remainder were affirmed), and as a result of applying our criteria, the maximum potential rating for our rated portfolio is now 'AAA (sf)'. This article summarizes the impact of the sovereign upgrade and subsequent events on our Spanish RMBS ratings, and highlights key rating transitions.

On March 23, 2018, we raised our unsolicited long-term sovereign rating on Spain to 'A-' from 'BBB+'. Following the sovereign upgrade, on April 6, 2018, we took rating actions on several Spanish banks, some of which are counterparties for some of the Spanish RMBS transactions that we rate.

On April 17, 2018, we revised our outlook assumptions for the Spanish residential mortgage market to benign to reflect the improved Spanish residential mortgage and real estate market, and lowered our projected losses at the 'B' rating level for the archetypal Spanish pool (see "Outlook Assumptions For The Spanish Residential Mortgage Market"). At that time, we rated 95 Spanish RMBS transactions comprising 318 tranches.

Following the application of our structured finance ratings above the sovereign criteria, our counterparty criteria, and our European residential loans criteria, on April 24, 2018, we placed on CreditWatch positive our ratings on 217 tranches in 83 Spanish RMBS transactions (68% of the Spanish RMBS tranches that we rated; see "Ratings On 213 Tranches In 82 Spanish RMBS Transactions Placed On CreditWatch Positive" and "Ratings In Spanish Synthetic RMBS Transaction castellana finance Placed On CreditWatch Positive," published on April 30, 2018).

Maximum Potential Rating For Spanish RMBS Transactions Is Now 'AAA (sf)'

Our structured finance ratings above the sovereign criteria classify the sensitivity of these transactions as moderate (see "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, 2016). Therefore, after our March 23, 2018 upgrade of Spain to 'A-' from 'BBB+', the highest rating that we can assign to the senior most tranche in Spanish RMBS transactions is six notches above the Spanish sovereign rating, or 'AAA (sf)'.

Additionally, we raised long-term issuer credit ratings (ICRs) on several Spanish banks which are dependent counterparties in the transactions we reviewed. Consequently, this raised some of the counterparty rating caps in some of the transactions.

Our European residential loans criteria, as applicable to Spanish residential loans, establish how our loan-level analysis incorporates our current opinion of the local market outlook (see "Methodology And Assumptions: Assessing Pools Of European Residential Loans," published on Aug. 4, 2017). Our current outlook for the Spanish housing and mortgage markets, as well as for the overall economy in Spain, is benign. Therefore, we revised our expected level of losses for an archetypal Spanish residential pool at the 'B' rating level to 0.9% from 1.6%, in line with our European residential loans criteria, by lowering our foreclosure frequency assumption to 2.00% from 3.33% for the archetypal pool at the 'B' rating level (see "Guidance: Methodology And Assumptions: Assessing Pools Of European Residential Loans," published on April 17, 2018).

Rating actions resulting in ratings between (and including) 'A- (sf)' and 'AAA (sf)', reflected our revised outlook assumptions for the Spanish residential mortgage market and the sovereign upgrade and, if applicable, the bank upgrades.

Rating actions resulting in ratings between (and including) 'B- (sf)' and 'BBB+ (sf)', reflected our revised outlook assumptions for the Spanish residential mortgage market and, if applicable, the bank upgrades, as the tranches were rated below the rating on the sovereign.

Tranches that we rated between (and including) 'D (sf)' and 'CCC+ (sf)' were dependent on favorable business, financial, or economic conditions, rather than being affected by our revised outlook assumptions or the bank or sovereign upgrades.

More Than 77% Of Ratings On CreditWatch Positive Raised; Remainder Affirmed

In July 2018, we completed our review following our credit, cash flow, operational, counterparty, legal, stability and macroeconomic analysis of 80 RMBS transactions (288 tranches), which had at least one rating on CreditWatch positive (of the initial 83 transactions with ratings on CreditWatch positive, three fully redeemed).

Of the 212 tranches that we reviewed that had ratings on CreditWatch positive, we:

• Affirmed 48 tranches (22.6%): Most (35 tranches) in the 'BBB+' to 'B-' rating category. This reflects that the assets' underlying characteristics and the notes' structural features mitigated the positive impact of our revised outlook assumptions for the Spanish residential mortgage market and the upgrades of rating dependent counterparties and the sovereign.
• Upgraded 164 tranches (77.4%): 34 were upgraded to 'AAA (sf)', six notches above the rating on the sovereign, and five to 'AA+ (sf)', five notches above the rating on the sovereign because of counterparty rating limitations. Additionally, we upgraded 31 tranches to 'AA (sf)' because they were not the most senior tranches in their capital structures and their maximum potential ratings were constrained by the application of our structured finance ratings above the sovereign criteria.

Table 1 summarizes the type and number of rating actions taken at each rating level, of the tranches previously placed on CreditWatch positive. For example, of the 10 'A (sf)/Watch Pos' ratings outstanding at the time of our review, we raised seven of the ratings (70%) and affirmed three (30%).

Table 1

Of the 76 tranches that we reviewed that did not have ratings on CreditWatch positive, we:

• Affirmed 64 tranches (84.2%): 52 of them in the 'CCC (sf)', 'CC (sf)', and 'D (sf)' rating categories, and 12 of them were capped by either a dependent counterparty ICR, or by counterparty downgrade language.
• Upgraded eight tranches (10.5%): Two of them to 'AA- (sf)' and 'AAA (sf)' from 'A+ (sf)' because of a counterparty replacement during the resolution process, one of them to 'CCC- (sf)' from 'D (sf)' as the transaction had repaid all due and previously unpaid interest amounts. We upgraded the other five tranches to within the 'CCC' rating category.
• Downgraded four tranches (5.3%) to 'CCC- (sf)' from 'CCC (sf)' due to their vulnerability to favorable business, financial, or economic conditions.

Table 2 shows rating transitions at each rating level for the 288 ratings that we reviewed. For example, of the 12 'A (sf)' ratings outstanding at the time of our review, we affirmed five ratings at 'A (sf)', raised one rating to 'A+ (sf)', raised three ratings to 'AA- (sf)', and raised three ratings to 'AA (sf)'.

Table 2

Spanish RMBS Weighted-Average Rating Rises To 'A+ (sf)' From 'A (sf)'

The current Spanish RMBS portfolio that we rate comprises 91 transactions and 307 tranches, after Bancaja 5, Fondo de Titulización de Activos' July 18, 2018 redemption. Our completed review has resulted in the improvement of our weighted-average rating for the portfolio to 'A+ (sf)' from 'A (sf)'.

Of the portfolio, 34.6% of the outstanding balance of the notes is now rated 'AAA (sf)', 60.8% is rated above the rating on the sovereign (including 'AAA [sf]'), and 23.2% is rated 'A- (sf)', which is in line with the rating on the sovereign.

Tranches rated 'D (sf)' now comprise 1.4% of the portfolio due to interest shortfalls that these notes continue to experience. Their interest payments have either been postponed in the priority of payments due to interest deferral triggers being breached, or because reserve funds are being used (asset-backed notes issued at closing to fund the reserve funds).

Chart 1

We did not place our ratings on CreditWatch positive in 12 transactions as:

• Our ratings on 15 tranches were capped by the downgrade language included in the guaranteed investment contract (GIC) accounts; and
• Our ratings on seven tranches were speculative grade (rated 'CC [sf]', 'CCC [sf]', or 'D [sf)]').

Since our CreditWatch positive placements of the affected tranches, three transactions fully redeemed before the conclusion of our review:

• IM Banco Popular MBS 2, Fondo de Titulizacion de Activos on June 22, 2018 (two ratings previously on CreditWatch positive).
• Fondo de Titulizacion de Activos UCI 18 on June 18, 2018 (one rating previously on CreditWatch positive); and
• Fondo de Titulizacion de Activos, Hipotebansa 11 on May 16, 2018 (two ratings previously on CreditWatch positive).

Tables 3 and 4 list all of the Spanish RMBS ratings that we reviewed.

Table 3

Table 4

We will continue to closely monitor the Spanish RMBS transactions that we rate. To do this, we periodically review the performance and attributes of the underlying portfolios, and monitor the ratings on the supporting counterparties and sovereign and evaluate the outlook of the mortgage market. If any of these variables change, we would assess the impact on our rated portfolio.

Related Criteria

• Criteria - Structured Finance - General: Methodology And Assumptions: Assessing Pools Of European Residential Loans, Aug. 4, 2017
• Criteria - Structured Finance - General: Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions, Aug. 8, 2016
• Criteria - Structured Finance - General: Counterparty Risk Framework Methodology And Assumptions, June 25, 2013
• Criteria - Structured Finance - General: Global Derivative Agreement Criteria, June 24, 2013
• General Criteria: Methodology: Credit Stability Criteria, May 3, 2010

Related Research

• Spanish RMBS Index Report Q1 2018, May 24, 2018
• Ratings On 213 Tranches In 82 Spanish RMBS Transactions Placed On CreditWatch Positive, April 24, 2018
• Ratings In Spanish Synthetic RMBS Transaction castellana finance Placed On CreditWatch Positive, April 30, 2018
• Outlook Assumptions For The Spanish Residential Mortgage Market, April 17, 2018
• Guidance: Methodology And Assumptions: Assessing Pools Of European Residential Loans, April 17, 2018
• Reduced Funding Risks Lead To Upgrades At Several Spanish Banks, April 6, 2018