DBRS Confirms “A” Ratings on Novo Banco S.A. Conditional Pass-Through Covered Bonds

DBRS Ratings Limited (DBRS) has today confirmed the “A” ratings on the Obrigações Hipotecárias (OH or the Portuguese legislative covered bonds) issued under the Novo Banco S.A. (Novo Banco, or the Issuer) Conditional Pass-Through Covered Bond Programme (NB PT OH or the Programme). This action follows the rating action on the Issuer on 13 April 2017 when DBRS placed the Issuer’s senior ratings Under Review with Negative Implications. These include the Issuer, Senior Long-Term Debt and Deposits rating of CCC (high) and the Short-Term & Deposit rating of R-5. DBRS has confirmed the Critical Obligations Ratings (COR) at BB (low) / R-4, with Stable trend.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BB (low). Novo Banco is the Issuer and Reference Entity (RE) for the Programme. There is a Long Term Critical Obligations Rating (LT COR) assigned to the RE. DBRS does not consider OH to be a systemically important financing tool in Portugal; however, DBRS considers the assets in the programme to be strategic to the core activity of the RE.
-- A Legal and Structuring Framework (LSF) assessment of Adequate associated with NB PT OH.
-- A Cover Pool Credit Assessment (CPCA) of A (high), being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of BBB (high).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 9.2%, to which DBRS gives credit, being the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.9.

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. In accordance with the “Rating European Covered Bonds” methodology, no forced asset liquidation has been modelled for this transaction given the conditional pass-through structure, and DBRS has assumed several prepayment scenarios ranging from 0% to 10%.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by two notches, resulting in a downgrade of the covered bonds rating by two notches. In addition, everything else being equal, the CB ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below A (high); (2) the LSF assessment associated with the programme was downgraded; or (3) the quality and consistency of the cover pool (CP) was no longer sufficient to support a two-notch uplift for high recovery prospects.

As of March 2017, the aggregated outstanding balance of the cover pool underlying the NB PT OH was EUR 4.6 billion. The total amount of liabilities outstanding is EUR 4.15 billion, yielding a current nominal OC ratio of 11.4%. The OC level to which DBRS gives credit is 9.2%, after applying a scaling factor of 0.9 to the minimum level of OC observed during the last 12 months.

The vast majority (99.96%) of the assets in the CP are prime residential mortgage loans, the rest being Spanish and Italian government bonds. The mortgage CP has a weighted-average (WA) current unindexed loan-to-value ratio of 56.2%, a WA seasoning of 101 months and a WA remaining time to maturity of 289 months. Geographically, the pool is mainly distributed in Lisbon (39.6% by outstanding balance), the North (27.5%) and the Centre (20.3%).

The Programme does not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (93.3% floating rate linked to different indexes and reset dates) and the interest paid to the CB holders, linked to three-months Euribor plus 25 basis points with quarterly resets. If the maturity of the bonds is extended, the outstanding series becomes pass-through paying one-month Euribor plus 25 basis points on a monthly basis. This risk is partly mitigated by the OC available and has been accounted for in DBRS’s cash flow model.

As of today, the WA life of the cover pool was roughly 14 years based on a 0% prepayment rate, which is longer than the 3.5 years WA life on the OH, not accounting for any extension of maturity. All CP assets and 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 NB PT OH as Adequate 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 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 at www.dbrs.com 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, DBRS focused on the asset and 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 investor reports and CP loan-by-loan data provided by Novo Banco. DBRS considers the data and 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 information it receives in connection with the rating process.

The last rating action on this transaction took place on 22 December 2016 when DBRS assigned an “A” rating to Series 5.

The lead analyst responsibilities for this transaction have been transferred to Roger Bickert.

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: Roger Bickert, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 15 December 2015

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)
-- 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 for European Securitisations
-- 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