DBRS Places Caixa Economica Montepio Geral Covered Bonds Under Review with Developing Implications

DBRS Ratings Limited (DBRS) has today placed the “A” rating on the EUR 2 billion of Obrigações Hipotecárias (OH, the Portuguese legislative covered bonds) issued under Caixa Economica Montepio Geral (Montepio or the Issuer) Covered Bonds Programme Under Review with Developing Implications, following completion of annual full review cycle.

The “A” ratings on the CBs were placed Under Review with Negative Implications on 9 February 2016, following publication on 4 February 2016 of a Request of Comments for the “Rating European Covered Bonds” methodology that proposed a new analysis for the determination of the Covered Bonds Attachment Point (CBAP). On 18 March, as part of the consolidated results announcement, Montepio announced its intention to restructure the Programme in a Conditional Pass-Through (CPT) structure. DBRS expects that, provided sufficient mitigating features are incorporated in the CPT structure, the rating could be upgraded.

However, should the restructuring not be carried out, the ratings could be downgraded by two notches to BBB (high) from the current “A,” based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BB (high). Montepio is the Issuer and Reference Entity for the Programme. The issuer rating was downgraded from BBB (low) to BB (high) in September 2015.
-- A Legal and Structuring Framework (LSF) Assessment of Modest associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-Implied Likelihood (LSF-L) of BBB (low).
-- A two-notch uplift for high recovery prospects.
-- A committed minimum overcollateralisation of 35%. DBRS gives full credit to such commitment in accordance with its methodology. Such level is not subject to haircut, as DBRS has observed it has been historically persistent for the past 24 months.

The transaction was modeled with the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and market spread values to calculate liquidation values on the cover pool.

Everything else being equal, and in the absence of a restructuring in CPT structure, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch to BBB.

In addition, the ratings of the Programme would be downgraded if any of the following occurs: (1) the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for good recovery prospects, (2) the CPCA were downgraded below BBB (low), (3) the relative amortisation profile of OH and CP moved adversely, or (4) volatility in the financial markets caused the currently estimated market value spreads to increase.

As at 31 December 2015, the cover pool had a total outstanding balance of EUR 2,725,891,480. The available OC is 36.29%, which is above the current Issuer commitment OC of 35%.

As of December 2015, the weighted-average current unindexed loan-to-value of the mortgages was 54.18%. Fixed-rate mortgages in the cover pool accounted for 5.7% of notional, whilst floating-rate mortgages represented 94.3% of cover pool balance. All covered bonds are indexed to a floating rate. All cover assets are denominated in euros, as well as all covered bonds. As such, investors are not currently exposed to any foreign exchange risk.

The Modest LSF Assessment reflects DBRS’s view of: (1) the satisfactory level of segregation provided by the CB legal framework and the CB holders’ first priority right on the CP; (2) the composition of the CP, being 100% residential mortgage loan; (3) the lack of any prescriptive structural mitigant or equivalent regulatory feature that might ensure the CP meeting interest and senior costs on the CB in the immediate aftermaths of an assumed issuer default; (4) the role of the Bank of Portugal in the supervision of the Portuguese CB on retained covered bonds; and (5) an asset monitor that only indirectly reports to the regulator on a regular basis.

For more information, please refer to DBRS commentaries “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review,” both available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating European Covered Bonds (March 2016). This can be found on www.dbrs.com at http://www.dbrs.com/about/methodologies. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at http://www.dbrs.com/about/methodologies.

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

The sources of information used for this rating include investor reports provided by the Issuer. 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 9 February 2016, when DBRS placed the rating of this programme Under Review with Negative Implications, following the publication of a request for comments for its “Rating European Covered Bonds Methodology.”

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: 30 November 2011
Initial Rating Committee Chair: Claire Mezzanotte

Lead Analyst: Vito Natale
Rating Committee Chair: Quincy Tang

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

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Critical Obligations Rating Criteria
-- Global Methodology for Rating Banks and Banking Organisations
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- The Effect of Sovereign Risk on Securitisations in the Euro Area
-- Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at http://www.dbrs.com/research/278375.