DBRS Confirms Novo Banco S.A. Covered Bonds (Obrigações Hipotecárias - Mortgages - CPT) at “A”

DBRS Ratings Limited (DBRS) confirmed its “A” ratings on the Obrigações Hipotecárias (OH; the Portuguese legislative Covered Bonds) issued under the Novo Banco S.A. (Novo Banco or the Issuer) Conditional Pass-Through Covered Bond Programme (the Programme). The confirmation follows the amendments to Series 1.

According to its restated terms, the expected maturity date of Series 1 is updated to 7 October 2021. The extended maturity date remains unchanged at 7 October 2065. These amendments have no impact on the ratings of the covered bonds outstanding under the Programme.

There are five series of OH outstanding under the Programme, with a nominal amount of EUR 4.2 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BB, which is the Long Term Critical Obligations Rating of Novo Banco. Novo Banco is the Reference Entity (RE) for the Programme. DBRS does not consider OH to be a systemically important financing tool in the Republic of Portugal; however, DBRS considers the assets in the Programme are strategic to the core activity of the RE.
-- 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 level of overcollateralisation (OC) of 9.0% to which DBRS gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.9.

The transaction was analysed with the DBRS European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets and interest rate stresses.

Everything 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 (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 backing Novo Banco’s OH was EUR 4.6 billion as of 30 June 2018 while the total amount of liabilities outstanding is EUR 4.2 billion, yielding a current OC ratio of 10.0%. The OC level to which DBRS gives credit is 9.0%, after applying a scaling factor of 0.9 to the minimum level of OC observed during the last 12 months.

The vast majority (99.96%) of the loans in the CP are prime residential mortgage loans, the rest being cash reserve. The mortgage CP has a weighted-average (WA) current unindexed loan-to-value ratio of 57.1%, a WA seasoning of 98 months and a WA remaining time to maturity of 299 months. Geographically, the pool is mainly distributed in Lisbon, Portugal (41.6% by outstanding balance), as well as the north (26.7%) and centre (19.4%) of Portugal.

Novo Banco’s OH do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (90.2% floating rate linked to different indexes and reset dates) and the interest paid to the CB holders, linked to three-month Euribor plus 25 basis points with quarterly resets. If the maturity of the bonds is extended, the outstanding series become pass-through paying one-month Euribor plus 25 basis points on a monthly basis. This risk is mitigated by the OC available and has been accounted for in DBRS’s cash flow analysis.

The DBRS-calculated WA life of the mortgage assets is roughly 14 years based on a 0% prepayment rate, which is longer than the 2.7 years of WA life on the CB, not accounting for any maturity extension. This is mitigated by the conditional pass-through nature of the OH.

All CP assets and CB 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” 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 ratings 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 amendments to Series 1. 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 these ratings 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 ratings, 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 these ratings 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 4 December 2017, when DBRS confirmed the “A” ratings on Novo Banco’s outstanding OH at that time.

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: Gareth Levington, Managing Director
Initial Rating Date: 15 December 2015

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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
-- Interest Rate Stresses 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
-- 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.