DBRS Maintains Novo Banco Covered Bonds Ratings Under Review with Developing Implications

DBRS Ratings Limited (DBRS) has today maintained its rating of BBB (low) on all outstanding series of obrigações hipotecárias (the Portuguese legislative covered bonds) issued under Novo Banco, S.A. (NB or the Issuer) Covered Bonds Programme (the Programme) Under Review with Developing Implications following the recent rating confirmation of the Issuer’s Senior Long-Term Debt and Deposits at BB (low) on 20 July 2015 and concomitant placement Under Review with Negative Implications.

The rating of the covered bonds was initially placed Under Review with Developing Implications on 5 August 2014 after similar action on the Issuer rating following the creation of Novo Banco S.A. from the previous Banco Espirito Santo S.A. The rating on the covered bonds was subsequently maintained Under Review with Developing Implications on 17 December 2014 with the implementation of the new methodology “Rating European Covered Bonds” (December 2014), as the rating could have potentially been upgraded to BBB from the current BBB (low), based on the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of BB (low) being the Senior Long-Term Debt and Deposits rating of the Issuer. The Issuer is also the Reference Entity for the Covered Bonds.
-- A Legal and Structuring Framework (LSF) Assessment of “Average” assigned to the NB Programme.
-- A Cover Pool Credit Assessment (CPCA) of BB, being the lowest CPCA in line with the covered bonds rating.
-- An LSF-Implied Likelihood (LSF-L) of BB (high).
-- Two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) to which DBRS gives credit of 32%, being the level of OC to which the Issuer commits in the investor report. Such a level is not subject to haircut, as DBRS has observed that it has been persistent for the past 24 months

The Issuer’s Intrinsic Assessment was recently revised to B from B (low) on 20 July 2015. At the same time, the Senior Long-Term Debt and Deposits rating of NB was confirmed at BB (low). However, DBRS changed its review status on this rating to Under Review Negative from Under Review Developing, as DBRS is reviewing the implications of recent developments in European regulation and legislation regarding the Bank Recovery and Resolution Directive on its European banks ratings. Moreover, on 22 May 2015, DBRS published a Request for Comments for the “Rating European Covered Bonds” methodology that may affect the determination of the CBAP. The review on the covered bonds will be resolved only once the review on the Issuer rating is resolved and the Request for Comments for the “Rating European Covered Bonds” methodology is finalised.

All else equal, a downgrade of the Reference Entity rating by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a confirmation of the current covered bonds rating at BBB (low). A downgrade of the Reference Entity rating by two notches would lead to a downgrade of the LSF-L by two notches, resulting in a downgrade of the current covered bonds rating by one notch.

There are four series of covered bonds outstanding under the Programme for a total amount of EUR 3.04 billion. As of June 2015, the cover assets amount to EUR 4.28 billion, resulting in a nominal OC of 32.5%. This is above the current Issuer commitment OC of 32.0%.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is: “Rating European Covered Bonds.” This can be found on www.dbrs.com at http://www.dbrs.com/about/methodologies.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

The sources of information used for this rating include historical default performance data and loan-by-loan level information on the cover pool provided by NB that allowed DBRS to further assess the portfolio. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

The last rating action on this Programme took place on 26 May 2015, when DBRS maintained the rating of all outstanding Series Under Review with Developing Implications.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository, see
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Keith Gorman
Initial Rating Date: 24 February 2012
Initial Rating Committee Chair: Claire Mezzanotte

Last Rating Date: 26 May 2015

Lead Analyst: Valentina Cicerone
Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

The rating methodologies and criteria used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies

-- Rating European Covered Bonds
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model Methodology for European Securitisations