DBRS Takes Rating Actions on the Existing and the New Series of Securities in Banco Popular Portugal Mortgage Covered Bonds Programme

DBRS Ratings Limited (DBRS) has today confirmed its BBB (high) rating and maintained the Under Review with Developing Implications status on the Series 5 and 6 Obrigações Hipotecárias (OH or the Portuguese legislative covered bonds) in the Banco Popular Portugal (BPP or the Issuer) Mortgage Covered Bonds Programme (the Programme). DBRS has also assigned a BBB (high) rating to the new Series 7 OH issued under the programme and placed it Under Review with Developing Implications. The rating actions follow the completion of a full review of the programme.

Series 7 is a EUR 300 million floating-rate security maturing in September 2018 and replaces Series 4 which is fully redeemed at maturity. DBRS has discontinued its rating on series 4 following the redemption.

The rating actions are based on the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of BBB, being the Senior Unsecured Long Term Debt & Deposit Rating of BPP. BPP is the Issuer and Reference Entity (RE) for the programme.
-- A Legal and Structuring Framework (LSF) Assessment of “Modest” assigned to the Programme
-- An LSF-Implied Likelihood (LSF-L) of BBB. In DBRS’s view, the Programme’s LSF-L is limited by the CBAP due to insufficient historical performance data for DBRS to form a view on the timeliness of cash flows deriving from the Cover Pool (CP) in case of an assumed default of BPP.
-- One notch uplift for good recovery prospects. DBRS has formed a view on the availability and sufficiency of the CP to satisfy the claims of the OH holders in a post issuer insolvency scenario.
-- The minimum legislative overcollateralisation (OC) of 5.26% envisaged for Portuguese OH.

DBRS published its updated “Rating European Covered Bonds Methodology” on 8 September 2015 (please see the DBRS website under Methodologies). The updated methodology redefines the analysis for deriving the CBAP of a European Programme with a RE subject to the Bank Recovery and Resolution Directive (BRRD), and may give up to two notches of uplift from the RE’s senior unsecured rating.

The RE’s current senior unsecured rating incorporates a notching benefit from the sovereign support and is currently under review. DBRS will not be able to take conclusive rating actions on the Programme before, at a minimum, the review of RE’s rating is concluded. The under review status on the RE follows DBRS’s review of implications from the recent developments in European regulation and legislation regarding the BRRD.

At the same time, DBRS published a press release announcing its intention to introduce a Preferred Obligations Rating for European banks that it rates (please refer to the DBRS website under Commentaries). DBRS considers the approach for the Preferred Obligations Rating similar to that for the determination of CBAP. To the extent that the Preferred Obligations are introduced, they will likely provide the starting point for the CB. Should the intention to introduce Preferred Obligation Ratings eventually materialise, the conclusion of the review on the CB ratings may be further delayed.

DBRS has assessed the LSF related to the Programme as Modest, 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.

The total outstanding amount of securities under the Programme is EUR 815 million. As of the end of June 2015, the CP balance is EUR 871 million including 82.23% residential and 17.59% commercial mortgages. The nominal OC is 6.89%, above the legislative minimum OC.

Following a wind-down cash flow simulation aimed at covering the cost of funding under a stress scenario, which yielded good recovery prospects on the OH, DBRS granted a one-notch uplift from the LSF-L rating, BBB. As a result, DBRS confirms the Programme’s rating at BBB (high).

Everything else equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch.

In addition, everything else equal, the ratings of the programme would be downgraded if the quality and consistency of the cover pool were no longer sufficient to support one notch uplift for good recovery prospects.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating European Covered Bonds (8 September 2015).

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release. This can be found at http://www.dbrs.com/about/methodologies.

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 loan-by-loan level information on the CP provided by the Issuer.

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.

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 rating concerns a newly issued financial instrument. The last rating action on this Programme took place on 30 June 2015, when DBRS assigned a BBB (high) rating to Series 6, placed it Under Review with Developing Implications.

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

This rating is Under Review with Developing Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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: 31 August 2012
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
1 Minster Court, 10 Floor Mincing Lane
London EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960.

The rating methodologies 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 and 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 analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.