DBRS Downgrades Rating on Atlantes Mortgage N° 2

DBRS Ratings Limited (DBRS) has today downgraded its rating of the Class A notes of Atlantes Mortgage N° 2 to AA (low) (sf) from AA (sf).

The downgrade of the Class A notes reflects the different structure of the Atlantes Mortgage N° 2 transaction compared with the Atlantes Mortgage N° 3, 4, 5 and 7 transactions whereby the cash reserve provides support not only to the senior notes but also to the mezzanine and junior notes. Additionally, although the transaction envisages an interest rate swap agreement, as the language of the hedging agreement is not in line with DBRS’s Derivative Criteria for European Structured Finance Transactions, no benefit was given to such hedging in DBRS’s analysis. Therefore, when DBRS applied interest rate stresses based on its Unified Interest Rate Model methodology to simulate the basis risk and various prepayment scenarios and default timing curves, the available credit enhancement to the Class A Notes was insufficient to cover the DBRS expected losses at the AA (sf) rating level. The assets in the pool are performing well, as detailed below.

Atlantes Mortgages N° 2 is a securitisation of Portuguese residential mortgage loans originated and serviced by Banco Internacional do Funchal S.A. (Banif).

The current 90+ delinquency ratio as a percentage of the performing balance of the portfolio has decreased to 1.68% in December 2014, down from 2.30% in March 2014. The cumulative default ratio (as a percentage of the original balance) slightly increased over the year and reached 2.74% in December 2014, but it is still below DBRS’s base case portfolio default rate of 7.36%.

Credit enhancement to the Class A notes is provided by subordination of the Class B and Class C notes and a cash reserve. Credit enhancement to the Class A notes as a percentage of the performing balance of the portfolio increased to 16.96% in December 2014, up from 16.49% in March 2014.

The transaction benefits from a cash reserve available to cover losses and interest shortfalls on the Class A, B and C notes. The cash reserve is allowed to amortise if certain conditions defined in the legal documentation are met. As of December 2014, the cash reserve stands at the initial and target level of EUR 16.125 million, i.e. 7.88% of the outstanding balance of the Class A notes.

HSBC Bank plc is the Treasury Account Bank for the transaction. The DBRS private rating of HSBC Bank plc is above the Minimum Institution Rating given the rating assigned to the Class A Notes, as described in the DBRS Legal Criteria for European Structured Finance Transactions.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the Master European Structured Finance Surveillance Methodology. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

This 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 the DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary at: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include payment reports provided by HSBC Bank plc and data from the European DataWarehouse. 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 26 March 2014 when DBRS confirmed the Class A notes at AA (sf).

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

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- DBRS expected a lifetime base case Probability of Default (PD) and Loss Given Default (LGD) for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of mortgages for the Issuer are 7.36% and 6.51%, respectively. At the AA (low) (sf) rating level, the corresponding PD is 22.99% and the LGD is 16.22%.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes would be expected to fall to AA (low).

Class A notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of BBB (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

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: Alastair Bigley
Initial Rating Date: 17 May 2012
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Elisa Scalco
Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
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

Legal Criteria for European Structured Finance Transactions
Master European Structured Finance Surveillance Methodology
Derivative Criteria for European Structured Finance Transactions
Operational Risk Assessment for European Structured Finance Servicers
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
Unified Interest Rate Model for European Securitisations