DBRS Assigns “A” Rating to Caixa Económica Montepio Geral Covered Bonds (Obrigações Hipotecárias - Mortgages - CPT) Series 10

DBRS Ratings Limited (DBRS) assigned an “A” rating to the Series 10 Obrigações Hipotecárias (OH; the Portuguese legislative Covered Bonds) issued under the Caixa Económica Montepio Geral (Montepio or the Issuer) CPT Covered Bonds programme (the Programme). Series 10 is a EUR 750 million fixed-rate OH, paying a coupon of 0.875% and maturing in October 2022.

Concurrently, DBRS discontinued the rating on Series 7 as it was repaid in full early on 13 October 2017.

The ratings on all other series outstanding under the Programme have been confirmed at “A”. Following the issuance of Series 10, full redemption of Series 7 and partial redemption of Series 9, there are five series of OH outstanding under the Programme for a total nominal amount of EUR 2.3 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BB. Montepio is the Issuer and Reference Entity for the Programme. Montepio was not assigned a Long Term Critical Obligations Rating nor does DBRS consider Portugal as a jurisdiction in which Covered Bonds are a particularly important financing tool;
-- A Legal and Structuring Framework (LSF) Assessment of Adequate associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A (low), which is 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 committed minimum overcollateralisation (OC) of 18%. DBRS gives full credit to such commitment in accordance with its principal methodology. Such level is not subject to a haircut as DBRS considers it to be persistent based on historically observed levels.

The transaction was modelled with 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 LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch.

In addition, all else unchanged, the OH ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below A (low); (2) the LSF Assessment associated with the Programme was downgraded; or (3) the quality of the cover pool and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.

As of June 2017, the aggregated outstanding balance of the CP backing Montepio’s OH was EUR 2.73 billion, including EUR 2.72 billion of mortgages and EUR 6.4 million of cash. The total amount of liabilities outstanding is EUR 2.30 billion, yielding a current OC ratio of 18.6%. The Issuer has publicly committed to maintain an OC level of 18.0%.

As of June 2017, the CP comprised 58,978 residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 52.7% and a WA seasoning of 130 months. Geographically, the pool is mainly distributed in Lisbon (37.2% by outstanding balance), as well as north (27.6%) and central (15.5%) Portugal.

The vast majority of the loans in the CP (approximately 94%) are floating rate, while 67% of the OH Series are floating-rate, indexed to three-month Euribor. The interest rate mismatch is mitigated by an external interest rate swap on the fixed rate bond.

A CP swap entered into between the Issuer and The Royal Bank of Scotland plc partly hedges the basis risk. However, no credit was given to such a swap in DBRS’s analysis, as the swap documentation does not comply with DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

As of today, the DBRS-calculated WA life of the CP was roughly 13 years based on a 0% prepayment rate, which is longer than the 5.8 year WA life on the OH, not accounting for any extension of maturity. This is mitigated by the conditional pass-through (CPT) nature of the OH. 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 Programme as Adequate according to its rating methodology. For more information, please refer to DBRS’s commentaries, “DBRS Assigns LSF Assessment to Portuguese Covered Bonds,” “Portuguese Covered Bonds: Legal and Structuring Framework Review” and “DBRS Upgrades Caixa Económica Montepio Geral Covered Bonds to A (high) Upon Restructuring in CPT, Removes UR-D,” which are 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.

In DBRS’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the cash flow analysis. A review of the transaction legal documents was limited to the documentation pertaining to the issuance of Series 10 and partial redemption of Series 9. All the other 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 provided by the Issuer.

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 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 6 July 2017, when DBRS confirmed its “A” ratings on the outstanding OH.

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 and US regulations only.

Lead Analyst: Roger Bickert, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 1 December 2011

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

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Global Methodology for Rating 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