An affiliate of BBVA is securitizing €265 million in Spanish mortgages, a majority of which are formerly delinquent loans from the Catalonia region returned to performing status.

The portfolio consists of well-seasoned (average 9.08 years), first-lien mortgages of 2,585 Spanish borrowers, with an existing weighted average LTV of 55.27%, which is lower than the average for Spanish RMBS transactions, according to Moody’s Investors Service.

However, nearly three-quarters of the loans were issued under “flexible” line-of-credit mortgage structures, which have historically had higher default probabilities than “plain vanilla” Spanish mortgages, Moody’s stated in a presale report issued this week.

The deal – known as SRF 2016-1, Fondo de Titulizaci-n – involves re-performing mortgages that returned to current status more than three years ago and have remained current.

The capital stack involved four classes of notes, including the €182.8 million tranche A bonds that received a provisional ‘Aa2’ structured finance rating from Moody’s.

Next in line of priority are the B-tranche notes sized at €18.6 million, rated ‘A2’; the C tranche of €10.6 million, rated ‘Baa2’; and an unrated D tranche totaling €53 million.

Credit enhancement for the notes is 37% (A-tranche), 30% (B-tranche), and 26% (C-tranche), inclusive of subordination and a six-percent reserve fund.

All of the notes will carry a coupon rate to be determined above three-month Euribor rate, prior to a planned step-up reset date after October 2021.

Nearly 75% of the loans were previously restructured and over 93% have been current for at least 37 months.

The loans were originated by predecessor banks of Catalunya Banc S.A., of which Banco Bilbao Vizcaya Argentaria (BBVA) S.A. acquired a majority share in April 2015.  Last month, Catalunya was absorbed by and merged with BBVA.

BBVA will be the servicer of the loans in the SRF pool after they are transferred from Anticipa Real Estate, S.L.U., the existing manager following the assets’ transfer in April 2015 by Catalunya Banc to a securitization fund.

One of the challenges to the portfolio’s credit quality, however, is the high content of flexible mortgages, which are structured as a line of credit allowing borrowers to take out cash up to a certain LTV ratio. It was a flagship product of Catalunya Banc, and adds to a higher expected default frequency of the portfolio.

Another uncertainty is the status of a so-called “energy poverty” law enacted by the regional Catalonia government, according to Moody’s. The Catalonia “24/2015” law enacted in 2015 was passed to place more obstacles to evictions, but has a provision that could permit homeowners to seek out a release from their mortgage debt if the loan is reassigned to a third party.

Under Spanish federal law, homeowners remain liable for debt even upon a foreclosure.

Moody’s adjusted its ratings for the potential volatility of the law, although it has been suspended upon a Spanish central government challenge to 24/2015 – as well as Moody’s belief that borrowers would have difficulty navigating the procedures to enlist the law’s protections.

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