DBRS Takes Rating Actions on Covered Bonds Following Resolution of BES, Creation of Novo Banco, S.A.

DBRS Ratings Limited (DBRS) has today taken certain rating actions following the Bank of Portugal’s announcement of the resolution of Banco Espírito Santo S.A. (BES). DBRS has assigned a BBB (low) rating to the obrigações hipotecárias (OH, the Portuguese legislative covered bonds) which have been assigned to Novo Banco (the Issuer), the temporary bridge bank which takes over all unsubordinated debt of BES. The OH ratings have been concomitantly placed Under Review with Developing Implication, to reflect the rating action on the Issuer.

At the same time, DBRS has downgraded the OH issued by BES to BBB (low) from A (low), removed the ratings from Under Review with Negative Implications, and Discontinued-Withdrawn the ratings as the debt is now transferred to the bridge bank.

The BBB (low) rating Under Review with Developing Implications of the Novo Banco OH are based on the following analytical considerations:
• The Senior Long-Term Debt & Deposits rating of Novo Banco of BB (low), Under Review with Developing Implications.
• DBRS Legal and Structuring Framework (LSF) assessment of “Adequate” associated with the programme.
• The cover pool credit assessment of BB (high) and an Issuer voluntary Over-collateralisation (OC) level of 32%.
• The issuer’s capabilities with respect to origination of the cover pool assets and servicing of the cover pool.

On August 1, 2014 DBRS downgraded former BES’s Senior Unsecured Long-Term Debt & Deposit rating to BB (low) from BBB (low). At that point, the ratings remained Under Review with Negative Implications. On August 3, 2014 the Bank of Portugal announced it had applied a resolution measure to BES, with the problem assets, including exposures to Espírito Santo Group entities and Banco Espírito Santo Angola, remaining in BES along with the subordinated liabilities and equity. At the same time, the remaining assets and liabilities were immediately and definitively transferred to Novo Banco. On August 5, 2014 DBRS has transferred to Novo Banco both the Intrinsic Assessment and the Long-Term Debt & Deposits rating of BES.

As of June 2014, the cover assets amount to EUR5.499bn resulting in a nominal OC of 36.13%. This is above the current Issuer commitment OC of 32%.

Everything else equal, should the Issuer rating be downgraded by one notch to B (high), the ratings of the covered bonds would be downgraded by one notch to BB (high).

All the loans in the cover pool are prime residential mortgage loans, with a weighted average (WA) current indexed loan-to-value ratio of 62.77% and a WA seasoning of 88 months. The pool is geographically diversified across the country and mostly originated for the purpose of acquiring first or second homes.

98.55% of the cover pool notional is represented by floating rate mortgages, indexed to Euribor. Series 3 and Series 6 OH are fixed rate covered bonds and swaps are in place to cover this mismatch.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable is: “Rating European Covered Bonds”. This can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

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” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include historical default performance data and loan by loan level information on the cover pool provided by the Issuer that allowed DBRS to further assess the portfolio. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This rating is under review, pending more detailed information on the status of Novo Banco. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS will look for further clarification on the financial soundness of the entity, including updated information on its funding and liquidity position. Once more information is available, DBRS will provide further clarification regarding the rating.

This is the first DBRS rating action on the covered bonds under the Novo Banco OH programme.

The last rating action on the covered bonds under BES OH programme took place on 14 July 2014, when DBRS placed the covered bonds Under Review with Negative Implications.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“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 regulations only.

Disclosures on Novo Banco OH Programme:
Initial Lead Analyst: Vito Natale
Initial Rating Date: 5 August 2014
Initial Rating Committee Chair: Claire Mezzanotte

Disclosures on BES covered bonds Programme:
Initial Lead Analyst: Keith Gorman
Initial Rating Date: 7 March 2012
Initial Rating Committee Chair: Claire Mezzanotte

Last Rating Date: 14 July 2014

Lead Analyst: Vito Natale
Rating Committee Chair: Claire Mezzanotte

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

• Rating European Covered Bonds
• Global Methodology for Rating Banks & Banking Organisations
• Legal Criteria for European Structured Finance Transactions
• Master European Residential Mortgage-Backed Securities Rating Methodology
• Master European Structured Finance Surveillance Methodology
• Operational Risk Assessment for European Structured Finance Servicers
• Unified Interest Rate Model Methodology for European Securitisations