DBRS Confirms Ratings on Santander Totta Covered Bonds Programme

DBRS Ratings Limited (DBRS) has today confirmed its rating of ‘A’ and maintained the Under Review with Developing Implications status on all outstanding series of obrigações hipotecárias (the Portuguese legislative covered bonds) issued under Santander Totta S.A. (Totta, or the Issuer) €12,500,000,000 Covered Bonds Programme. The confirmation follows the completion of the annual review process. There are €6.75 billion covered bonds outstanding under the Programme.

These ratings are Under Review with Developing Implications following the publication on 22 May 2015 of a Request For Comments for the “Rating European Covered Bonds” methodology that proposes a new analysis for the determination of the Covered Bonds Attachment Point for those Reference Entities that are subject to the Bank Recovery and Resolution Directive. The review on the covered bonds will be resolved only once the Request For Comments for the “Rating European Covered Bonds” methodology is finalised.

The A rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point of BBB (high), being the Senior Unsecured Long-Term Debt & Deposit Rating of Totta. Totta is the Issuer and Reference Entity for the Programme;
-- A Legal and Structuring Framework (LSF) Assessment of Average assigned to Totta’s OH Programme;
-- A Cover Pool Credit Assessment (CPCA) of BB, being the lowest CPCA in line with the final covered bonds (CB) rating;
-- An LSF-Implied Likelihood (LSF-L) of BBB (high);
-- Two notches uplift for high recovery prospects;
-- A level of overcollateralisation (OC) to which DBRS gives credit of 15%, being the level of OC the Issuer commits to in the investor report. Such a level is not subject to haircut as DBRS has observed as historically persistent for the past 24 months.

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 being equal, a downgrade of the Issuer rating by two notches would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the CB rating by one notch. In addition, everything else equal, the ratings of the Totta OH would be downgraded if any of the following occurs: (1) the sovereign rating of the Republic of Portugal were downgraded below BBB (low); (2) the LSF Assessment associated with the Programme were downgraded to Modest; (3) the quality and consistency of the cover pool 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.

As of March 2015, the cover assets amount to €7.841 billion, resulting in a nominal OC of 16.17%. This is above the current Issuer commitment OC of 15%.

All the loans in the cover pool are prime residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 54.79% and a WA seasoning of 102 months. The pool is geographically diversified across the country and originated for the purpose of acquiring first or second homes.

For further information on Totta’s OH Programme, please refer to the rating report at www.dbrs.com.

DBRS has assessed the LSF related to Totta’s 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,” both 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 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 historical default performance data and loan--by-loan level information on the cover pool provided by Totta 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.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

The last rating action on this Programme took place on 26 May 2015 when DBRS placed the ratings under Review with Developing Implications upon the publication on 22 May 2015 of a Request For Comments for the “Rating European Covered Bonds” methodology.

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 (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: Keith Gorman
Initial Rating Date: 24 February 2012
Initial Rating Committee Chair: Claire Mezzanotte

Last Rating Date: 26 May 2015

Lead Analyst: Valentina Cicerone
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

-- 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
-- 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.