DBRS Confirms A (high) Ratings on Caixa Geral Depósitos S.A. Covered Bonds (Obrigações Hipotecárias - Mortgages)

DBRS Ratings Limited (DBRS) has today confirmed the A (high) ratings on the Obrigações Hipotecárias (OH; the Portuguese legislative covered bonds) issued under Caixa Geral de Depósitos, S.A.’s (CGD or the Issuer) covered bond programme (the Programme). The confirmation follows the completion of a full review of the ratings. There are currently EUR 5.27 billion of OH outstanding under the Programme, EUR 1.5 billion of which is retained.

Concurrently, DBRS has discontinued the ratings on Series 1 (Tranches 1 and 2), Series 7 and Series 9, which have all been repaid in full.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (high), which is the Long-Term Critical Obligation Rating (LT COR) of CGD. CGD is the Issuer and the Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), which is the lowest CPCA in line with the assigned 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 28% that DBRS gives credit to, which is the level of OC to which the Issuer commits in the investor report.

The transaction was modelled with DBRS’s European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults, recoveries of the assets and interest rate stresses as well as market value spreads to calculate liquidation values on the cover pool (CP).

Everything else being equal, a downgrade of the CBAP by two notches would lead to a downgrade of the covered bonds ratings by one notch. In addition, the ratings of the OH would be downgraded if any of the following occurred: (1) the CPCA were downgraded below BBB (low), (2) the quality and consistency of the CP were no longer sufficient to support a two-notch uplift for high recovery prospects, (3) the relative amortisation profile of the OH and CP were to move adversely or (4) volatility in the financial markets were to cause the currently estimated market value spreads to increase.

CGD ratings were placed Under Review with Negative Implications on 29 November 2016. This review reflects the uncertainties around the implementation of the planned restructuring of the group following the recent resignation of the majority of the board of directors on 27 November 2016 and difficulties in improving profitability and asset quality. For more information, see the press release “DBRS Places Caixa Geral de Depósitos Ratings Under Review With Negative Implications.”

Everything else being equal, should the LT COR of CGD be downgraded by one notch, the LSF-L would remain unchanged at A (low), having no effect on the final ratings of the OH.

As at September 2016, the total CP balance was EUR 9.83 billion, including EUR 9.70 billion of mortgages and EUR 126.76 million of Portuguese sovereign bonds. As at today, there were EUR 5.27 billion of covered bonds outstanding under CGD OH, giving a total OC of 84%, which is above the committed OC of 28%.

Also as at September 2016, the mortgage CP comprised 228,482 residential mortgages granted to individuals with an average loan amount of EUR 42,451.The weighted-average current loan-to-value of the mortgages was 50.3% with a seasoning of 127 months. The CP was mainly distributed between Lisbon, Portugal (33.4% by outstanding balance); Northern Portugal (27.1%); and Central Portugal (22.1%).

Of the loans in the CP, 99.9% pay a floating interest rate indexed to Euribor, while 64.6% of the covered bonds are fixed rate. No swaps are in place to mitigate such a mismatch, and this has been accounted for in DBRS’s modelling.

All CP assets are denominated in euros, as are the OH. As such, investors are not currently exposed to any foreign exchange risk.

As at the cut-off date, the weighted-average life of the CP was 12.9 years based on a 0% prepayment rate, which is longer than the 3.9 years weighted-average life on the OH when taking into account the expected maturity. This risk is partly mitigated by the OC available and partly by a 12-month extendable maturity feature by which, should the Issuer default on its payment on the covered bonds at the respective expected maturity date, the covered bond maturities are automatically extended on a monthly basis up to 12 months.

DBRS has assessed the LSF related to CGD OH as Average according to its rating methodology. For more information, please refer to the 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 to the rating 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.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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 dynamic performance data and loan-by-loan-level information on the CP provided by the Issuer that allowed DBRS to further assess the portfolio.

DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS does not audit or independently verify the data or the information it receives in connection with the rating process.

The last rating action on this transaction took place on 10 March 2016, when DBRS upgraded the ratings of CGD OH following the implementation of the new covered bonds methodology.

The lead analyst responsibilities for this transaction have been transferred to Alessandra Maggiora.

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

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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.

Lead Analyst: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 10 September 2012

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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)
-- Global Methodology for Rating Banks and Banking Organisations
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- 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
-- Unified Interest Rate Model Methodology for European Securitisations
-- 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.