DBRS Assigns Rating to Pelican SME No. 2

DBRS Ratings Limited (DBRS) has today assigned a rating to the Class A Notes issued by Sagres - Sociedade de Titularização de Créditos, S.A. (the Issuer) as follows:

-- EUR 545,900,000 Class A Asset-Backed Floating Rate Securitisation Notes due 2043: A (low) (sf)

The transaction (Pelican SME No. 2) is a cash flow revolving securitisation collateralised by a portfolio of bank loans to Portuguese small and medium-sized enterprises (SMEs), entrepreneurs, self-employed individuals and associations. The loans were mainly granted by Caixa Económica Montepio Geral (Montepio or the Originator), while 5.8% of the initial portfolio balance was originated by Finibanco before its integration with Montepio in 2011. DBRS does not rate the Class B, Class C, Class D and Class S Notes.

The economic effect of the transfer of the initial portfolio (a mix of term loans and revolving line of credit) took place on 1 February 2015 (the Initial Collateral Determination Date), with an aggregate par balance of EUR 1,091.67 million, consisting of 13,800 loans to 9,924 borrower groups. As of 1 February 2015, no loans were in arrears by more than 30 days, while 3.7% were in arrears by less than 30 days and 15.0% benefited from grace periods.

The transaction has a 24-month revolving period, during which the originator has the option to sell to the Issuer new loans in the form of term loans and revolving lines of credit. Following the end of the revolving period, the transaction will enter into a 12-month offering period whereby the Originator will have the option to sell to the Issuer only additional drawings under revolving lines of credit already in the portfolio. The purchase of new loans or additional drawings will be financed first with principal cash flows, but also with further issuances of Class D Notes at the option of the Originator. Class D Notes are subordinated to the Class A Notes and therefore further issuances of the Class D Notes will increase the credit enhancement available for the Class A Notes.

The purchase of new loans during both the revolving and offering period will be subject to certain conditions and limitations (the Portfolio Tests). Furthermore, the revolving period and offering period will prematurely end after the occurrence of certain events, including the termination of Montepio as Servicer and a breach of the Portfolio Tests.

The rating of the Class A Notes is based upon DBRS’s review of the following items:
-- The portfolio characteristics:
-- The portfolio is mainly unsecured. Secured loans represent 24.6% of the initial portfolio balance and according to the Portfolio Tests the weighted-average loan-to-value has to be maintained at below 100%.
-- The portfolio exhibits moderate obligor concentration, with the exposure to the largest one, ten and twenty borrowers representing 1.8%, 12.4% and 18.1% of the initial portfolio, respectively. The exposure towards DBRS industry “Building & Development” (30.4% of the initial portfolio) is high, particularly considering that more than 60% of top 30 borrowers belongs to such industry. Overall, the portfolio regional concentrations reflect the distribution of the Montepio branches across Portugal.
-- The Portfolio Tests closely resemble the initial portfolio, adequately limiting borrower concentration, industry concentration, interest rate risk, credit and collateral quality deterioration. DBRS modelled the transaction by creating a “worst case” scenario based on Portfolio Tests and the Servicer’s permitted variations.
-- If principal proceeds exceed the purchase price of new loans, then only up to 10% of the initial portfolio can be set aside to buy additional portfolios in the next payment dates, while the remaining funds will be used to pay down Class A Notes.
-- The structure allows the use of principal to pay interest on the Class B and Class C Notes, which combined with a weak provisioning mechanism (24 months) has a deteriorating impact on the credit quality of Class A Notes.
-- The Cash Reserve (CR) is non-amortising and will be maintained at EUR 16.37 million. The CR is available to cover senior expenses and interest shortfalls on the Class A Notes as long as the Class A Notes are outstanding. After the payment in full of the Class A Notes, the CR will be available to cover senior expenses and interest shortfalls on the Class B Notes and Class C Notes once Class B Notes have paid in full.
-- Montepio will act as the Servicer and Whitestar Asset Solutions, S.A. will act as the Back-up Servicer. DBRS in its analysis has factored a further loss of funds which may arise from commingling risk due to the “cold” nature of back-up servicing arrangements.
-- The transaction addresses the set-off risk with the proceeds of the issuance of the Class S Notes, funded by the Originator. During the revolving and offering period, the purchase of new loans is subject to the set-off risk being covered by further issuances of Class S Notes, if needed.
-- At closing, the credit enhancement for the Class A Notes is 51.50%, which DBRS considers to be sufficient to support its A (low) (sf) rating.
-- The adequacy of the transaction parties’ financial strength and capabilities to perform their respective duties, and the quality of origination, underwriting and servicing practices.
-- The ability of the Class A Notes to withstand stressed cash flow assumptions and repay Noteholders according to the approved terms. Interest and principal payments on the Class A Notes will be made monthly.
-- The soundness of the legal structure and the presence of legal opinions which address the true sale of the assets to the trust and the non-consolidation of the Issuer, as well as consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions”.

DBRS determined the rating of the Class A Notes as follows, as per the principal methodology specified below:
-- The annualised probability of default (PD) for the securitised portfolio, determined using the arrears data supplied, was computed to be 6.23%.
-- The assumed weighted-average life (WAL) of the portfolio was 3.97 years.
--The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the target rating.
-- The recovery rate was determined by considering the market value declines (MVDs) for Portugal, the security level and the type of collateral. Recovery rates of 46.47% and 16.25% were used for the secured and unsecured loans at the A (low) (sf) rating level.
-- The Break-Even Default Rates for the interest rate stresses and default timings were determined using the DBRS Cash Flow Model.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)”. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

All DBRS methodologies can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisation in the Euro Area” at:
http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include the parties involved in the rating, including but not limited to Montepio, the Issuer and the Arranger, The Royal Bank of Scotland plc.

The vintage performance data provided matched the definition that DBRS bases its analysis on. The historical performance data was based on the 90 days past due definition used by DBRS. DBRS also used additional static default data based on a 180 days past due definition provided by Montepio to incorporate a cure rate component in its loss assumptions. DBRS considers the overall 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 concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

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

To assess the impact a change of the transaction parameters would have on the ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the ratings (the Base Case):
-- Probability of Default Rates Used: Base Case PD of 6.23%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base Case Recovery Rates, corresponding to a recovery rate of 22.29% at the A (low) (sf) stress level, a 10% and 20% decrease in the Base Case Recovery Rates.

DBRS concluded that a hypothetical increase of the Base Case PD by 20% would cause a downgrade of the Class A Notes to BBB (low) (sf). A decrease in the recovery rate assumption by 20% would lead to a downgrade of the Class A Notes to BBB (high) (sf). A scenario combining an increase in the PD by 10% and a decrease in the recovery rate assumption by 10% would cause a downgrade of the Class A Notes to BBB (sf).

It should be noted that the interest rates and other parameters that would normally vary with rating level, including the recovery rates, were allowed to change as per the DBRS methodologies and criteria.

For further information on DBRS’s historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository see:
http://cerep.esma.europa.eu/cerepweb/statistics/defaults.xhtml.

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

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Marcello Bonassoli
Initial Rating Date: 10 March 2015
Initial Rating Committee Chair: Carlos Silva, SVP European Structured Credit

DBRS Ratings Limited
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London, EC3R 7AA
United Kingdom

Registered in England and Wales: No. 7139960

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

“Rating CLOs Backed by Loans to European Small and Medium Sized Enterprises (SMEs)”
“Rating Methodology for CLOs and CDOs of Large Corporate Credit”
“Legal Criteria for European Structured Finance Transactions”
“Unified Interest Rate Model for U.S. and European Structured Credit”
“Cash Flow Assumptions for Corporate Credit Securitizations”
“Operational Risk Assessment for European Structured Finance Servicers”
“Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”