DBRS Upgrades Santander Totta S.A. Covered Bonds (Obrigações Hipotecárias - Mortgages) to A (high)

DBRS Ratings Limited (DBRS) upgraded the outstanding series of the Santander Totta S.A. Covered Bonds (Obrigações Hipotecárias - Mortgages) (OH or the Portuguese legislative covered bonds (CBs)) issued under the Banco Santander Totta S.A. (Totta or the Issuer) EUR 12.5 billion OH Programme (the Programme) to A (high) from “A”.

The upgrade follows the rating action on the Issuer on 7 December 2017 when DBRS upgraded the Issuer’s long-term ratings to A (low) from BBB (high). The trends on the Issuer’s ratings remained Stable.

Concurrently, DBRS assigned a A (high) rating to Series 20 issued under the Programme. Series 20 is a EUR 750,000,000 fixed-rate bond, paying a coupon of 1.201% and maturing on 7 December 2027.

Following the issuance of Series 20, there are ten series of OH outstanding under the Programme for a total nominal amount of EUR 7.70 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (low), which is the Long-Term Issuer Rating of Totta. Totta is the Issuer of and Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) of A (low).
-- A two-notch uplift for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 15%. 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 cash flow structure was analysed using the DBRS European Covered Bond Cash Flow Tool. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and market value spreads to calculate liquidation values on the cover pool (CP).

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 CB ratings by one notch. In addition, all else unchanged, the OH ratings would be downgraded if the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.

The aggregated outstanding balance of the CP (as at 7 December 2017) backing Totta’s OH was EUR 8.92 billion. The total amount of liabilities outstanding is EUR 7.70 billion, yielding a current OC ratio of 15.8%. The Issuer has publicly committed to maintain an OC level of 15.0%.

As at December 2017, the CP comprised 174,524 residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 55.7% and a WA seasoning of 106 months. Geographically, the pool is mainly distributed in Lisbon (37.3% by outstanding balance), as well as the north (30.7%) and centre (17.9%) of Portugal. All loans were originated for the purpose of acquiring first or second homes.

The vast majority of the loans in the CP (approximately 98%) are floating rate, indexed to different bases and reset at different times, while all OH series are fixed rate. The interest rate mismatch is mitigated by intra-group swap agreements; however, the swap documentation does not incorporate DBRS language. As such, no credit was given to swaps in DBRS’s analysis, and the interest rate mismatch has been taken into account in DBRS’s analysis.

The DBRS-calculated WA life of the CP is roughly 15 years based on a 0% prepayment rate, which is longer than the current 6.3-year WA life on the OH, not accounting for any extension of maturity. This risk is mitigated by the Extended Maturity Date, which falls one year after the Maturity Date, and by the OC in place.

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 “Average” 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.”

In DBRS’s opinion, the change(s) 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 20. 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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

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 26 September 2017, when DBRS assigned an “A” rating to OH 23 Tranche 1 - PTBSRJOM0023.

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: 27 February 2012

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
-- 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
-- Rating Sovereign Governments

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.