DBRS Comments on Impact of New CB Methodology on Novo Banco Covered Bonds

DBRS Ratings Limited (DBRS) maintains the BBB (low) rating of the EUR 4 billion Obrigações Hipotecárias (OH, the Portuguese legislative covered bonds) issued under Novo Banco OH Programme (the Programme) as Under Review with Developing Implications following the implementation of the new DBRS methodology “Rating European Covered Bonds,” published 17 December 2014 (the Methodology).

This rating is Under Review Developing Implications because the Novo Banco S.A. rating of BB (low) is also Under Review with Developing Implications.

The Methodology supersedes the previous methodology “Rating European Covered Bonds,” published 30 January 2014, and reflects a material update to the methodology DBRS uses to rate and monitor European covered bonds.

The implementation of the Methodology could potentially lead to an upgrade of the Novo Banco OH Programme rating to BBB from BBB (low) if the rating of Novo Banco were to be confirmed, based on the following analytical considerations:
• A Covered Bonds Attachment Point of BB (low), being the Senior Long-Term Debt & Deposit Rating of Novo Banco. Novo Banco is the Issuer and Reference Entity for the Programme.
• A Legal and Structuring Framework (LSF) Assessment of “Average” assigned to Novo Banco OH Programme.
• A Cover Pool Credit Assessment (CPCA) of BB, being the lowest CPCA in line with the covered bonds rating.
• An LSF-Implied Likelihood (LSF-L) of BB (high).
• Two notches uplift for high recovery prospects.
• A level of overcollateralisation (OC) to which DBRS gives credit of 32%, being the level of OC to which the Issuer commits in the investor report. Such a level is not subject to haircut as DBRS has observed that it has been persistent for the past 24 months.

A downgrade of the Reference Entity rating by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a confirmation of the current covered bonds rating at BBB (low). A downgrade of the Reference Entity rating by two notches would lead to a downgrade of the LSF-L by two notches, resulting in a downgrade of the current covered bonds rating by one notch.

The Reference Entity’s ratings is Under Review with Developing Implications. The review of the covered bonds will be resolved only once the conditions that led to the assignment of review of the Reference Entity’s rating are resolved.

The transaction was modelled with the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and market value spreads to calculate liquidation values on the cover pool.

As of 30 September 2014, the cover assets amount to EUR 5.35 billion, resulting in nominal OC of 32.5%. This is above the current Issuer commitment OC of 32%.

DBRS has assessed the LSF related to Novo Banco OH as Average according to its rating methodology. For more information, please refer to DBRS commentaries “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review,” available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating European Covered Bonds” (December 2014). This can be found on www.dbrs.com. 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.

The last rating action on this transaction took place on 5 October 2014 when DBRS assigned BBB (low) rating to the OH which have been assigned to Novo Banco from the former Banco Espírito Santo S.A. and concomitantly placed the OH ratings Under Review with Developing Implication, to reflect the rating action on the Issuer.

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.

Initial Lead Analyst: Vito Natale
Initial Rating Date: 5 August 2014
Initial Rating Committee Chair: Claire Mezzanotte

Last Rating Date: 5 August 2014

Lead Analyst: Valentina Cicerone
Rating Committee Chair: Quincy Tang

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