DBRS Places Banco BPI S.A. Covered Bonds Under Review with Developing Implications

DBRS Ratings Limited (DBRS) has today placed the A (high) ratings on the outstanding BPI obrigações hipotecárias (OH, the Portuguese mortgage covered bonds) issued under the Banco BPI S.A. (BPI) Covered Bonds Programme (the Programme) Under Review with Developing Implications.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) reflective of BPI’s likelihood that the source of payments will switch from the Reference Entity to the Cover Pool (CP). BPI is the Issuer and Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with BPI OH Programme.
-- A Cover Pool Credit Assessment (CPCA) of “A”, being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (low).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 32.5% that DBRS gives credit to, being the level of OC to which the Issuer commits in the investor report.

The ratings are placed Under Review with Developing Implications due to potential changes involving the issuer that could affect the CBAP - the strength of the Reference Entity as a primary source of payments for the covered bonds. Among other considerations, the Under Review status reflects the uncertainties surrounding the potential changes in the ownership structure of Banco BPI S.A. On the one hand, Caixabank S.A. achieving a majority stake in the capital of BPI could have a positive impact on the CBAP. However, DBRS also notes that if Caixabank is unable to make a successful bid, this may create challenges for the ownership structure of BPI. This would add to the regulatory challenges that the bank is already facing in reducing its significant concentration in Angola, which may lead to negative pressure on the CBAP. DBRS is undertaking a review of the credit strength of the Reference Entity and will remove the covered bonds rating from this status as soon as it is appropriate.

The transaction was modelled using 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 value spreads to calculate liquidation values on the CP.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by three notches, resulting in a downgrade of the covered bonds rating by three notches. In addition, everything else being equal, the BPI OH ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below “A;” (2) the sovereign of the Republic of Portugal were downgraded below BBB (low); (3) the LSF assessment associated with the Programme was downgraded; (4) the quality and consistency of the CP were no longer sufficient to support a two-notch uplift for high recovery prospects; (5) the relative amortisation profile of the OH and CP moved adversely; or (5) volatility in the financial markets caused the currently estimated market value spreads to increase.

The Programme was established in 2008 under the Portuguese covered bond law to issue up to EUR 7 billion of OH. The current outstanding amount of the OH is EUR 4.7 billion OH, while the aggregate balance of the mortgages in the cover pool is EUR 6.47 billion (as of June 2016), resulting in a total OC of 37.9%. The Issuer commits to maintain an OC of 32.5%.

As of 31 March 2016, the CP assets comprised EUR 6.07 billion of outstanding mortgage credits (99.76% of the CP) and EUR 14.49 million of other assets (0.24% of the CP). The CP comprises 124,176 residential mortgages with a weighted-average current unindexed loan-to-value ratio of 54%, a weighted-average seasoning of 100 months and a weighted-average remaining time to maturity of 293 months. The pool is geographically diversified across the country and almost entirely originated for the purpose of acquiring first or second homes (99%). All CP assets are denominated in euros, as well as all OH. As such, investors are not currently exposed to any foreign exchange risk.

Currently, BPI OH does not benefit from any swap contract to hedge the mismatches between the interest yielded by the CP (95.5% floating rate linked to different indexes and resets), and the interest paid to the covered bondholders, linked to three months Euribor with quarterly resets. The weighted-average life of the assets is roughly eight years, whereas the current weighted-average life of the OH is roughly five years, this generates an asset-liability mismatch that is partly mitigated by the available OC.

For further information on Banco BPI OH, please refer to the rating report available on www.dbrs.com.

DBRS has assessed the LSF related to BPI’s OH as Average according to its rating methodology. For more information, please refer to DBRS’s “Portuguese Covered Bonds: Legal and Structuring Framework Review” commentary 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 at http://www.dbrs.com/about/methodologies. In DBRS’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, an asset analysis, operational risk review and cash-flow were not conducted. A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action. Other methodologies and criteria 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 sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include historical default performance data and cover pool stratification tables and loan by loan data provided by Banco BPI that allowed DBRS to further assess the portfolio.

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.

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.

The last rating action on this Programme took place on 31 May 2016 when DBRS assigned a rating to a new series and confirmed all outstanding series.

This rating is Under Review with developing implications. The review of the covered bonds will be resolved only once the conditions that led to the assignment of the review status are resolved Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period.

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 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: Covadonga Aybar, Vice President
Initial Rating Date: 1 April 2015
Initial Rating Committee Chair: Claire Mezzanotte, Group Managing Director

Lead Analyst: Covadonga Aybar, Vice President
Rating Committee Chair: Erin Stafford, Managing Director

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
-- 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 methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.