DBRS Assigns Ratings to Banco BPI Covered Bonds Programme

DBRS Ratings Limited (DBRS) has today assigned a rating of A (high) to Banco BPI S.A. (BPI or the Issuer) Covered Bonds Programme (the Programme). At the same time, DBRS has placed the rating Under Review with Developing Implications. The BPI covered bonds programme was established in 2007 under the Portuguese covered bond law to issue up to EUR 7 billion of obrigações hipotecárias (OH, the Portuguese mortgage covered bonds).

The rating are based on the following analytical considerations:
-- A Covered Bonds Attachment Point reflective of BPI’s likelihood to meet its payment obligations on the OH. BPI is the Issuer and the Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of “Average” assigned to BPI OH programme.
-- A Cover Pool Credit Assessment (CPCA) of “A,” being the lowest CPCA in line with the covered bonds rating.
-- An LSF-Implied Likelihood (LSF-L) of A (low).
-- Two notches uplift for high recovery prospects.
-- A level of overcollateralization (OC) to which DBRS gives credit of 32.5%, being the level of OC to which the issuer commits in the investor report.

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.

Everything else equal, a downgrade of the Reference Entity rating by one notch would lead to a downgrade of the LSF-L by three notches, resulting in a downgrade of the covered bonds rating by three notches. In addition, everything else equal, BPI OH ratings would be downgraded if any of the following occurs: (1) the CPCA were downgraded below “A”; (2) the sovereign of the Republic of Portugal were downgraded below BBB (low); (3) the quality and consistency of the cover pool (CP) were no longer sufficient to support two notches uplift for high recovery prospects; or (4) volatility in the financial markets caused the currently estimated market value spreads to increase.

The “Average” LSF Assessment associated with the BPI OH programme reflects DBRS’s view of: (1) the satisfactory level of segregation provided by the OH legal framework and the CB holders’ first priority right on the CP, in combination with possible residual commingling risk as addressed by DBRS; (2) the composition of the CP, being 100% prime residential mortgage loans concentrated in a BBB (low) Domicile Sovereign, combined with a contractual provision whereby each CB maturity can be extended by 12 months, even though the period may not be entirely available to attempt a fire-sale of the CP as the issuer is not immediately required to look for alternative refinancing arrangements; (3) the lack of any regulatory requirement to cover temporary liquidity constraints; (4) the role of Bank of Portugal in the supervision of the Portuguese OH, combined with the high penetration of the OH as a funding tool for Portuguese banks in a BBB (low) Host Sovereign, and the role of the asset monitor that only reports to the regulator indirectly.

The issuer voluntarily maintains a dynamic liquidity reserve reset on a monthly basis prior to an issuer event of default to a level sufficient to cover CB interests coming due during the subsequent three months. Such reserve is currently held with an undisclosed external counterparty in line with the legal requirements. Portuguese Covered Bonds law requires the funds to be deposited with the Bank of Portugal or a financial institution rated at least A (low) or equivalent; however, this counterparty is subject to change from time to time at the discretion of the issuer to maximise the return on the funds deposited. The cash reserve is part of the cover pool and is reported to the Bank of Portugal as available funds of the cover pool.

The rating has been placed Under Review with Developing Implications due to potential changes involving the issuer that could affect the covered bond attachment point. Among other considerations, the Under Review status reflects the uncertainties surrounding the potential changes in the ownership structure of Banco BPI SA. The review of the covered bonds will be resolved only once the conditions that led to the assignment of the review status is resolved.

BPI has currently EUR 4.2 billion of OH outstanding under the programme, while the aggregate balance of the mortgages in the cover pool is EUR 5.79 billion (as of December 2014), resulting in a total OC of 38.8%. The issuer commits to maintain an OC of 32.5%.

As at 31 December 2014, the cover pool outstanding balance was EUR 5.79 billion and comprised 113,027 residential mortgages with a weighted-average current unindexed loan-to-value ratio (LTV) of 54.8%, a weighted-average seasoning of 89 months and a weighted-average remaining time to maturity of 300 months. The pool is geographically diversified across the country and almost entirely originated for the purpose of acquiring first or second homes (98.9%).

Currently, BPI OH do not benefit from hedging agreements to cover the mismatch between the interest paid by the cover pool’s (95% floating rate linked to different indexes and resets), and the interest paid to the covered bond holders, linked to three months Euribor with quarterly resets. The weighted-average life of the assets is roughly 7.9 years, whereas the current weighted-average life of the OH is roughly 6.3 years, producing a mismatch of approximately one-and-a-half years.

For further information on BPI OH, please refer to the ratings report that will be available on www.dbrs.com.

DBRS has assessed the LSF related to BPI’s OH as Average according to its rating methodology. For more information, please refer to DBRS’s “Portuguese Covered Bonds: Legal and Structuring Framework Review” commentary 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 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’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 historical default performance data and cover pool stratification tables 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 is the first DBRS rating on the BPI CB programme.

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 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: Covadonga Aybar
Initial Rating Date: 1 April 2015
Initial Rating Committee Chair: Claire Mezzanotte

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.

-- 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 and Jurisdictional Addenda
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model Methodology for European Securitisations

A description of how DBRS methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.