DBRS Upgrades Rating on Castilho Mortgages No.1

DBRS Ratings Limited (DBRS) upgraded its rating on the Class A notes issued by Castilho Mortgages No.1 (the Issuer) to AA (sf) from A (high) (sf).

The upgrade of the rating on the Class A notes follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies and defaults, as of the July 2017 payment date.
-- Updated portfolio default rate, loss given default and expected loss assumptions for the remaining collateral pool.
-- Current available credit enhancement to the Class A notes to cover the expected losses at the AA (sf) rating level.

Castilho Mortgages No.1 is a securitisation of Portuguese prime residential mortgages originated and serviced by Deutsche Bank AG, Portugal (Deutsche Bank, Portugal). The transaction follows the standard structure under Portuguese securitisation law and closed in September 2013.

LOSS ASSUMPTIONS
The transaction had a three-year revolving period, which ended in October 2016. Following the end of the revolving period, the portfolio base case default assumption reduced to 8.45% from 12.31% and the LGD assumption reduced to 8.31% from 27.41%.

PORTFOLIO PERFORMANCE
As of July 2017, 31 to 60 day arrears were at 0.17%, up slightly from 0.16% a year ago. The 90+ delinquency ratio has remained stable at 0.16%. Current cumulative write-offs stand at 0.53%.

CREDIT ENHANCEMENT
As of July 2017, credit enhancement to the Class A notes was 22.30%. Credit enhancement to the Class A notes consists of subordination of the Class B notes and a Cash Reserve.

The Cash Reserve is available to cover senior fees, any interest shortfall on the Class A and B notes and any principal shortfall (via the PDL) on the Class A notes. The Cash Reserve is currently at the target level of EUR 39.98 million and is permitted to amortise under certain conditions, subject to an absolute floor of EUR 13.33 million.

Deutsche Bank Aktiengesellschaft, Sucursal em Portugal (DBAG Portugal) is the Account Bank provider for the transaction. The DBRS private rating of DBAG Portugal complies with the Minimum Institution Rating given the rating assigned to the Class A notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transaction” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Master European Structured Finance Surveillance Methodology”.

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

A review of the related transaction legal documents has been conducted following an amendment to the Common Representative Appointment Agreement in December 2016. Other transaction legal documents that have remained unchanged since the most recent rating action were not reviewed.

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” found at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of data and information used for this rating include cash management reports provided by DBAG, Portugal (the Transaction Manager) and data from the European DataWarehouse GmbH.

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

At the time of the initial rating, DBRS was 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 this rating 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 14 September 2016 when DBRS confirmed the rating on the Class A notes at A (high) (sf).

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared with the parameters used to determine the rating (the Base Case):
-- DBRS expected a lifetime base case probability of default (PD) and loss given default (LGD) for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of mortgages for the Issuer are 8.45% and 8.31%, respectively. At the AA (sf) rating level, the corresponding PD is 26.51% and the LGD is 23.07%.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Class A notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes would be expected to remain at AA (sf).

Class A notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (sf)
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 and US regulations only.

Lead Analyst: Andrew Lynch, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 26 September 2013

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

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

-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Unified Interest Rate Model for European Securitisations

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.