DBRS Confirms Rating on Lusitano Mortgages No. 7 Limited

DBRS Ratings Limited (DBRS) has today confirmed the Class A Notes issued by Lusitano Mortgages No. 7 Limited (the Issuer) at AA (high) (sf).

The confirmation of the rating on the Class A Notes is based on the following analytical considerations, as described more fully below:

-- Portfolio performance, in terms of delinquencies and defaults, as of the January 2015 payment date.
-- Updated portfolio default rate, loss given default and expected loss assumptions for the remaining collateral pool.
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AA (high) (sf) rating level.

Lusitano Mortgages No. 7 Limited is a securitisation of first lien Portuguese residential mortgages originated by Banco Espirito Santo, S.A. (BES). On 3 August 2014, the Bank of Portugal announced it had applied a resolution measure to BES, with the problem assets 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, S.A. (Novo Banco). The servicer obligations, along with all general activities of BES, were transferred to Novo Banco, which now acts as servicer of Lusitano No.7’s mortgage pool. The transaction closed in September 2008 and initially had a three-year revolving period.

As of January 2015, the 90+ delinquency ratio was at 1.45%. The current cumulative default ratio is 5.99%. Defaulted loans are defined as those in arrears for more than 12 months.

As of the January 2015 payment date, credit enhancement to the Class A Notes was 27.21%, up from 26.29% in April 2014. Credit enhancement to the Class A Notes consists of subordination of the Class B and C Notes.

The transaction benefits from a Cash Reserve Fund that is available to cover senior fees and interest shortfall on the Class A and Class B Notes. The Cash Reserve Fund is currently at the target level of EUR 57 million.

As of January 2015, the transaction has a debit balance of EUR 30 million in the Principal Deficiency Ledger (PDL). Principal losses are recorded in the PDL as follows: 30% on the date that the mortgage asset is written off, 30% one year after the date of write-off and 40% two years after the date of write-off. Although the Cash Reserve Fund is at the initial and target level of EUR 57 million, its balance is not available to pay down debits in the PDL.

Citibank N.A., London Branch holds the Transaction Account for the transaction. The DBRS private rating of Citibank N.A., London Branch complies with the Minimum Institution Rating given the rating assigned to the Class A Notes, as described in DBRS’s “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”, which 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’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include investor reports provided by Citibank N.A., London branch 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 16 May 2014, when DBRS confirmed the Class A Notes at AA (high) (sf).

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with 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 11.23% and 17.80%, respectively. At the AA (high) (sf) rating level, the corresponding PD is 35.59% and the LGD is 34.40%.
-- 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 (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Class A Notes would be expected to remain at AA (high) (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 remain at AA (high) (sf).

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

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: Richard Hewitt
Initial Rating Date: 28 February 2011
Initial Rating Committee Chair: Claire Mezzanotte

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

DBRS Ratings Limited
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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 (December 2014)
-- Master European Structured Finance Surveillance Methodology (April 2015)
-- Operational Risk Assessment for European Structured Finance Servicers (January 2015)
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (January 2015)
-- Unified Interest Rate Model for European Securitisations (January 2013)