DBRS Downgrades Rating of the Class A Notes of Sagres – STC, S.A. (Pelican SME No. 1) to AA (sf)

DBRS Ratings Limited (DBRS) has today downgraded the rating of the Class A Asset Backed Floating Rate Securitisation Notes (“Class A Notes”) issued by Sagres – Sociedade de Titularização de Créditos, S.A. (the “Issuer”) from AA (high) (sf) to AA (sf). The rating will remain Under Review with Negative Implications.

The above rating actions reflect the changes made to the transaction, as approved in a noteholder’s written resolution dated 12 July 2011 and completed on the payment date of 15 July 2011. The material changes impacting the transaction are:
• Purchase of additional small- and medium-sized enterprises (“SME”) term loans
• Issuance of further Vertical Notes
• Amendment to the Pre-Enforcement Principal Payment Priorities, such that the amortisation of the Vertical Notes (up to the vertical redemption amount) is senior to the Class A Notes.
• Inclusion of a pro-rata amortisation feature between the Class A and Class B Notes.

The pro-rata amortisation between the Class A and Class B Notes is only possible, if the following conditions are met on each payment date:
• the Portfolio Delinquency Ratio does not exceed 5% for two consecutive calculation dates,
• the ratio of the outstanding amount of the Class A Notes divided by the amount of the Class A Notes, as of the closing date, is between 10% to 75%.
• the Cash Reserve account is at the required level,
• the Portfolio Default Ratio is less than 7%, and
• the exposure of the 10 largest borrowers does not exceed 20% of the outstanding portfolio balance.

The portfolio consists of the existing loans as well as the acquisition of 3239 loans totaling €446.6 million. The purchase of additional term loans was funded with the cash available in the fund’s payment account and the issuance of €139.5 million of additional Vertical Notes. The current portfolio outstanding balance, as of 15 July 2011, is €1354.7 million.

When the additional term loans were purchased, the following concentration limitations and collateral quality tests failed to satisfy their compliance requirements:
• the remaining weighted average life of the portfolio has increased to 4.2 years (above the 4 years test limit),
• the exposure to the top 3 obligors breached the required level of 1.2% of the outstanding portfolio balance to 1.71%, 1.41% and 1.22%, respectively,
• the percentage of the portfolio benefiting from mortgage collateral with a Loan-To-Value (“LTV”) below 85% is currently at 34.28% (below the minimum test level of 37.5%).
These exceptions to the portfolio tests have been approved in the noteholder’s written resolution and were taken into consideration in the DBRS’s analysis. Despite the above exceptions, the portfolio’s geographical and sector concentration levels continue to be, in DBRS’s opinion, reasonably diversified and within the transaction guidelines.

DBRS has reviewed the updated portfolio and used updated historical performance data provided by the originator to form an opinion about the credit risk. Based on this information, DBRS has determined a lifetime default level of 63.7% and assumed a weighted average recovery rate of 28.2% for the AA stress scenario. The default rate also reflects adjustments made to incorporate sovereign risk and additional default risk of the non-performing loans in the portfolio.

Despite the increase on the portfolio’s weighted average life the transaction benefits from the fact that it has entered in the amortisation phase. DBRS expects the Vertical Notes to retire within the next year due to the expected amortisation of the credit lines remaining in the portfolio. The portfolio consists of 11,161 term loans and 2,025 credit lines with an outstanding balance of €935.2 million and €419.5 million, respectively.

The original €504 million credit enhancement available to the Class A Notes is unaffected by the amendment. The credit enhancement is in the form of €472.5 million in subordination provided by the Class B Notes, and €31.5 million Cash Reserve account. However, the nominal credit enhancement provided by the Class B Notes may be reduced due to the inclusion of the pro-rata amortisation feature.

The rating continues to be Under Review with Negative Implications due to the fact that a backup servicer has not yet been appointed to the transaction. Caixa Económica Montepio Geral (“Montepio”) acts as the servicer of the SME loans and is currently rated BBB (low) with a negative trend by DBRS. The transaction’s legal documents specify that once the servicer is downgraded below BBB (low) it must use reasonable endeavors to appoint a backup servicer within 60 days.

The transaction is a cashflow securitisation collateralized primarily by a portfolio of bank loans originated by Montepio to Portuguese small- and medium-sized enterprises (“SMEs”). The DBRS rating addresses the Issuer’s ability to make timely payments of interest and ultimate payments of principal on or before the legal final maturity date in July 2036.

The principal methodology is the Master European Granular Corporate Securitisations (SME CLOs), which can be found on our website under Methodologies.

DBRS determined key inputs used in our analysis based on historical performance data provided for the originator and servicer as well as analysis of the current economic environment. Further information on DBRS’s analysis of this transaction will be available in a rating report on http://www.dbrs.com, or by contacting us at info@dbrs.com.

The sources of information used for these ratings include parties involved in the rating, including but not limited to Sagres – Sociedade de Titularização de Créditos, S.A., JP Morgan Securities Ltd. and Caixa Económica Montepio Geral. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

For additional information on DBRS European SME CLO(s), please see European Disclosure Requirements, located at http://www.dbrs.com/research/235269.

Lead Analyst: Carlos Silva
Rating Committee Chair: Jerry van Koolbergen
Initial Rating Date: 22 June 2010

Note:
All figures are in Euro unless otherwise noted.