DBRS Confirms Ratings on Tagus - Sociedade de Titularização de Créditos, S.A. (Aqua Finance No. 4)

DBRS Ratings Limited (DBRS) confirmed its ratings on the Class A Notes and Class B Notes (together, the Rated Notes) issued by Tagus - Sociedade de Titularização de Créditos, S.A. (Aqua Finance No. 4) (the Issuer):

-- Class A Notes at A (low) (sf)
-- Class B Notes at BBB (low) (sf)

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the Final Legal Maturity Date in June 2035. The rating on the Class B Notes addresses the ultimate payment of interest and principal on or before the Final Legal Maturity Date.

The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- The overall portfolio performance as of the June 2018 payment date, particularly with regard to delinquencies and defaults;
-- No Portfolio Tests were breached, nor events triggered the premature end of the revolving period; and
-- The current levels of credit enhancement (CE) available to the Rated Notes to cover the expected losses assumed in line with their respective rating levels.

The Issuer is a Portuguese securitisation of consumer and non-consumer loans, auto leases and rental agreements, and vehicles or equipment renting agreements granted and serviced by Montepio Crédito - Instituição Financeira de Crédito, S.A. (Montepio Crédito) to individuals and companies. Additionally, promissory agreements relating to certain auto leases and renting agreements have been included in the pool. Under these agreements, a third party undertakes to repurchase the related asset at the contract term, at a price agreed between Montepio Crédito and the supplier at origination. If the relevant supplier defaults, the originator may have to sell or re-lease the assets at a price lower than the agreed in the promissory notes, exposing the Issuer to residual value risk.

PORTFOLIO PERFORMANCE
As at the June 2018 payment date, one-to-two and two-to-three months delinquencies represented 1.0% and 0.5% of the principal outstanding balance of the portfolio, respectively, while three-to-six months delinquencies were 0.4%. Gross cumulative defaults were 0.1% of the original portfolio and cumulative transferred receivables, with cumulative recoveries of 20.8%.

REVOLVING PERIOD
The transaction closed in July 2017 and has an 18-month revolving period scheduled to end in January 2019. During this time, Montepio Crédito may offer new receivables to the Issuer, subject to certain conditions and limitations. The acquisition of additional receivables is funded through principal collections generated by the securitised portfolio.

Any principal available funds not applied towards the acquisition of new receivables will be transferred to the Issuer’s payment account and, if such funds exceed 10% of the original portfolio balance, the excess will be applied towards the amortisation of the Notes.

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 31.2% and the Class B Notes’ CE was 23.4%.

The non-amortising cash reserve is available to cover senior expenses and interest shortfalls on the Class A Notes; following the full amortisation of the Class A Notes, this reserve will be available to cover missed interest payments on the Class B Notes. The cash reserve also provides credit support to the Class A Notes through its subordination to the Class A Principal Deficiency Ledger. This reserve has been funded at closing through the proceeds of the Class C Notes issuance and it currently stands at its target level of EUR 7.0 million.

Deutsche Bank AG, London branch (DB London) is the Accounts Bank for the transaction. On the basis of the DBRS private ratings of DB 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.

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 DB London.

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 did 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 12 July 2017, when DBRS finalised the ratings assigned to the Rated Notes.

The lead analyst responsibilities for this transaction have been transferred to Joana Seara da Costa.

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 ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- PD: Base Case of 12.0% (including sovereign stress), a 25% and 50% increase on the Base Case PD.
-- Loss Given Default (LGD): Base Case of 87.2% (including sovereign stress), a 25% and 50% increase in the LGD.
-- Residual Value (RV) Loss: 37.0% and 33.6% for the A (low) (sf) and BBB (low) (sf) scenarios, respectively. Both scenarios with a 25% and 50% increase in the RV Loss.

DBRS concludes that for the Class A Notes:
-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (sf).
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, ceteris paribus, would lead to a confirmation of the Class A Notes at A (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead a downgrade of the Class A Notes to BBB (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, ceteris paribus, would lead to a confirmation of the Class A Notes at A (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead a downgrade of the Class A Notes to BBB (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 50% and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BB (high) (sf).

DBRS concludes that for the Class B Notes:
-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to B (sf).
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to below B (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead a downgrade of the Class B Notes to B (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes below B (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead a downgrade of the Class B Notes to B (sf).
-- A hypothetical increase of the RV Loss Rate by 50% and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes 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: Christian Aufsatz, Managing Director
Initial Rating Date: 21 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
-- 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.

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