DBRS Confirms Ratings on Montepio Covered Bonds Programme

DBRS, Inc. (DBRS) has today removed from Under Review with Negative Implications the rating of the outstanding Series of notes from the Montepio Covered Bonds Programme and confirmed the ratings of ‘A’ (low). The rating action reflects the following analytical considerations:

•Incorporation of a sovereign related stress component in our stress scenario due to the recent downgrade by DBRS of the Republic of Portugal’s sovereign from BBB Negative Trend to BBB (low) Negative Trend.
•The senior unsecured debt rating of Caixa Económica Montepio Geral, BBB (low) with Negative Trend by DBRS.
•DBRS Legal and Structuring Framework assessment of “Adequate”.
•Cover Pool Credit Assessment of “A”.
•Issuer Commitment Over-collateralisation level of 35.00%.
•Nominal Over-collateralisation level of 36.94% as of January 1, 2012.
•Montepio’s capabilities with respect to origination of cover pool assets and servicing of the cover pool.
•The credit quality of the collateral and structural features of the Programme (Extendable Maturity, collateral criteria and interest rate derivatives).

Following the DBRS downgrade of the Republic of Portugal’s long Term Foreign Currency and Long-Term Local Currency ratings from BBB to BBB (low) with Negative Trend (see press release “DBRS Downgrades Portugal to BBB (low) on Deteriorating Growth Outlook”, January 30th, 2012), DBRS conducted an updated loan level anlaysis of the cover pool as of January 31, 2012. The analysis also included an updated cash flow simulation based on the updated cover pool as well as various stress to timing of defaults and recoveries and interest rates to ensure the Notes are paid timely interest and principal in accordance with the Final Terms. Although the rating of the Notes remains at A (low), the Issuer Commitment Overcollateralization Level (35%) is sufficient to support a Cover Pool Credit Assessment of “A” versus A (high) when originally rated. The lower Cover Pool Credit Assessment of “A” to support the rating of the Notes is primarily driven by the less cash flows being available in scenarios where issuer insolvency occurs prior to the maturity of Series 1 Notes due to a widening between 1-month Euribor and 3- and 6- month Euribor. There is an asset swap in the Programme where on a monthly basis, Montepio pays a rate to the swap counterparty equal to the mortgage rate of the performing portfolio (which adjust to 3- month and 6-month Euribor) and receives a rate equal to 1-month Euribor plus 1.20%. Over this time period 1-month Euribor has decreased at a greater rate increasing the gap between the indices. As a result, the basis risk forecasted in the near term in the DBRS Unified Interest Rate model is increased causing a greater outflow of cash from the swap.

The Nominal Overcollateralization level was calculated by DBRS to reflect the amount of ineligible loans included in the cover pool as of January 31 (€976,067) due to loan-to values (LTVs) greater than 80%. Montepio has indicated the loans had updated desktop valuations on January 31 which resulted in higher LTVs. The ineligible loans have since been removed.

DBRS made appropriate adjustments to our model parameters based on the analysis of market value declines in DBRS and the historical performance data provided by the originator and servicer.

Notes:
All figures are in Euros unless otherwise noted.

The applicable methodologies are Rating European Covered Bonds, Global Criteria for Rating Banks & Banking Organisations, Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda, Legal Criteria for European Structured Finance Transactions, Operational Risk Assessment for European RMBS Servicers, Swap Criteria for European Structured Finance Transactions, Unified Interest Rate Model for European Securitisations and Master European Structured Finance Surveillance Methodology. For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area”.

The sources of information used for this rating include a data related to the cover pool provided by Montepio. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

For additional information on this rating, please see linking document.

This credit rating has been issued outside the European Union (EU) and may be used for regulatory purposes by financial institutions in the EU

Lead Analyst: Keith Gorman
Rating Committee Chair: Claire Mezzanotte
Initial Rating Date: December 1, 2011
Most Recent Rating Update: February 1, 2011