DBRS Confirms Banco Popular Portugal S.A. Obrigações Hipotecárias at BBB (low)

DBRS Ratings Limited (DBRS) has today confirmed at BBB (low) the ratings of the Obrigações Hipotecárias (OH, i.e. the Portuguese mortgage Covered Bonds) which are outstanding under the Banco Popular Portugal S.A. Covered Bonds (Obrigações Hipotecárias - Mortgages) programme (BPP OH, or the Programme).

There are currently three series of OH with a nominal amount of EUR 815 million outstanding under the Programme.

This rating action follows the downgrade of the Issuer’s ratings, and in particular its Senior Unsecured Long-Term Debt & Deposit rating to BB from BB (high), which occurred on 6 April 2017.

The ratings reflect the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of BB. Banco Popular Portugal (BPP) is the Issuer and Reference Entity for the Programme. DBRS has not assigned a Critical Obligations Rating to the Issuer, and does not classify Portugal as a jurisdiction in which covered bonds are a particularly important funding instrument.
-- A Legal and Structuring Framework (LSF) Assessment of Modest associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) of BB. In DBRS’s view, the Programme’s LSF-L is limited by the CBAP due to insufficient historical performance data being available for DBRS to form a view on the timeliness of cash flows deriving from the Cover Pool (CP) in case of an assumed default of the Issuer.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) to which DBRS gives credit of 7.09%, being the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.93.

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 and interest rate stresses.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the covered bonds rating by one notch. In addition, the ratings of the OH would be downgraded if the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects.

The total outstanding amount of OH is currently EUR 815 million, while the aggregate balance of the mortgages (as of 31 January 2017) in the CP is EUR 910 million, resulting in a total OC of 11.7%.

As of December 2016, the cover pool comprised 11,318 mortgage loans with a weighted-average current unindexed loan-to-value ratio of 54.8%, with an 87% residential and 13% commercial loans split. It is geographically concentrated in Lisbon (54%) and northern Portugal (23%). The pool is 89 months seasoned.

The vast majority of the loans in the cover pool (approximately 96%) are floating rate, while all OH Series are floating rate, indexed to one-month Euribor.

No swap agreements are in place in the Programme.

The weighted-average life of the assets is about 14 years, while that of the covered bonds is about 1.1 years. This generates an asset-liability mismatch that is partly mitigated by the 12-month maturity extension of the OH, and by the available OC.

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

DBRS has assessed the LSF related to the Programme as Modest, according to its rating methodology. For more information, please refer to DBRS’s commentaries, “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review,” both available at www.dbrs.com.

For further information on the Programme, please refer to the rating report that is available on www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating European Covered Bonds”.

In DBRS’s opinion, the change under consideration does not require the application of the entire principal methodology. Therefore, DBRS focused on a cash flow analysis.

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

Other methodologies referenced in this transaction are listed at the end of this press release. These 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 data and information used for this rating include historical default performance data and stratification tables on the cover pool provided by the Issuer.

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 considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

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

The last rating action on this transaction took place on 21 February 2017, when DBRS downgraded its ratings on the OH outstanding under the Programme to BBB (low) from BBB.

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: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 31 August 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)
-- 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
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating CLOs and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
-- The Effect of Sovereign Risk on Securitisations in the Euro Area

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.