DBRS Confirms and Upgrades Ratings on SAGRES - Sociedade de Titularização de Créditos, S.A. (Ulisses Finance No. 1)

DBRS Ratings Limited (DBRS) took the following rating actions on the Class A Notes, Class B Notes and Class C Notes (together, the Rated Notes) issued by SAGRES - Sociedade de Titularização de Créditos, S.A. (Ulisses Finance No. 1) (the Issuer):

-- Class A Notes confirmed at A (sf)
-- Class B Notes upgraded to BBB (high) (sf) from BBB (sf)
-- Class C Notes upgraded to BB (sf) from BB (low) (sf)

Additionally, DBRS removed the Under Review with Positive Implications (UR-Pos.) status on the Rated Notes, where they were placed on 11 May 2018 following the upgrade of the Republic of Portugal’s (Portugal) Long-Term Foreign and Local Currency – Issuer Ratings to BBB from BBB (low). For more information, see DBRS’s press release entitled “DBRS Upgrades Republic of Portugal to BBB, Stable Trend” published on 20 April 2018.

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- The updated default rates and expected loss assumptions, reflecting the upgrade of the Portuguese sovereign rating;
-- The overall portfolio performance as of the June 2018 payment date, particularly with regard to delinquencies and defaults; and
-- The current level of credit enhancement (CE) available to the Rated Notes to cover the expected losses assumed in line with their respective rating levels.

The ratings on the Rated Notes address the timely payment of interest and ultimate payment of principal on or before the Final Legal Maturity Date in March 2033.

The Issuer is a Portuguese securitisation of auto loan receivables granted and serviced by 321 Crédito – Instituição Financeira de Crédito, S.A. (321C). The transaction closed in July 2017 and has a 12-month revolving period scheduled to end on the July 2018 payment date.

As at 20 June 2018, the balance of the Class A Notes was EUR 120.1 million, the balance of the Class B Notes was EUR 7.0 million and the balance of the Class C Notes and Class D Notes was EUR 7.1 million each. The EUR 141.2 million portfolio (excluding defaulted receivables) includes loans granted to finance the purchase of mainly used vehicles (over 99% of the pool). The structure also includes the EUR 3.5 million Class E Notes, which were issued to fund the Cash Reserve Account and to pay the up-front premium to the Cap Counterparty and other expenses.

PORTFOLIO PERFORMANCE
As at the June 2018 payment date, total delinquencies represented 1.5% of the outstanding principal balance of the portfolio; the gross cumulative defaults were EUR 174,154.6.

PORTFOLIO ASSUMPTIONS
DBRS kept its expected probability of default (PD) and its base case recovery rate (RR) assumptions at 6.1% and 26.0%, respectively. However, the sovereign-adjusted PD and RR assumptions were updated to 7.3% and 25.4%, reflecting DBRS’s upgrade of Portugal’s Long-Term Foreign Currency rating to BBB with a Stable trend on 20 April 2018.

CREDIT ENHANCEMENT
CE is provided by the subordination of the junior obligations and the Cash Reserve Account. As at the June 2018 payment date, the Class A Notes’ CE was 16.4%, the Class B Notes’ CE was 11.4% and the Class C Notes’ CE was 6.4%.

The Cash Reserve Account is available to cover senior expenses and interest shortfalls on the Rated Notes. It also provides credit support to the Rated Notes through the subordination to the Class A, Class B and Class C Principal Deficiency Ledgers. Since closing, this account has been funded with EUR 2.0 million and its target level is set at 1.5% of the Rated Notes balance, subject to a EUR 1.3 million floor.

Citibank N.A., London branch (Citibank London) is the Accounts Bank for the transaction. On the basis of the DBRS private ratings of Citibank London and the mitigants outlined in the transaction documents, DBRS considers the risk arising from the exposure to the Accounts Bank to be consistent with the ratings assigned to the Rated Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

The transaction is exposed to interest rate risk as the Rated Notes are indexed to one-month Euribor and the majority of the securitised loans (89.9% of the portfolio by loan balance) pay fixed interest rates. In order to mitigate this interest rate mismatch, the Issuer entered into an interest rate cap agreement with Deutsche Bank AG, London branch (DB London). The DBRS private rating of DB London is consistent with the ratings assigned to the Rated Notes, as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions”.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

A review of the transaction legal documents was not conducted as the 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 these ratings include investor reports provided by Citibank London and loan-by-loan data from the European DataWarehouse GmbH.

DBRS does 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 11 May 2018, when DBRS placed the Rated Notes ratings UR-Pos., following the Portuguese sovereign rating upgrade.

Information regarding DBRS ratings, including definitions, policies and methodologies is available at 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 PD and 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 are 6.1% and 26.0%, respectively, excluding sovereign stress.

-- The Risk Sensitivity overview below illustrates the ratings expected for the Rated Notes if the PD and LGD increase by certain percentages over the base case assumptions. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to decrease to A (low) (sf), the rating of the Class B Notes to BBB (sf) and the rating of the Class C Notes to BB (low) (sf), all else being equal. If the PD increases by 50%, the rating of the Class A Notes would be expected to decrease to BBB (high) (sf), the rating of the Class B Notes to BB (high) (sf) and the rating of the Class C Notes to B (high) (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to decrease to BB (high) (sf), the rating of the Class B Notes to BB (low) (sf) and the rating of the Class C Notes below B (sf), all else being equal.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Class B Notes risk sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of BBB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)

Class C Notes risk sensitivity:
-- 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD, expected rating of BB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (sf)
-- 50% increase in PD, expected rating of B (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating below B (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating below B (sf)

For further information on DBRS historic 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: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 16 June 2017

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

-- Master European Structured Finance Surveillance Methodology
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers

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.