DBRS Confirms Santander Totta Covered Bonds at “A,” Removes Under Review with Developing Implications Status

DBRS Ratings Limited (DBRS) has today confirmed its “A” ratings on the Obrigações Hipotecárias (OH or the Portuguese legislative CBs) outstanding under the Santander Totta (Totta or the Issuer) Covered Bond (CB) Programme (the Programme). Concurrently, the ratings have been removed from the Under Review with Developing Implications status. Moreover, DBRS has discontinued the ratings on Series VIII, Tranche 1 and Series IX, Tranche 1 because of repayment in full. DBRS has also assigned an “A” rating to the Series XV, Tranche 1 fixed-rate OH maturing in October 2020 for an amount of EUR 750,000,000.

Following the early repayment of Series IX, Tranche 1; partial repayment of Series IX, Tranche 2; and issuance of Series XV, Tranche 1, there are EUR 6,500,000,000 of OH outstanding under the Programme.

The rating action follows the publication on 8 September 2015 of the updated “Rating European Covered Bonds” methodology. The ratings were placed Under Review with Developing Implications since the publication of the Request for Comments for the “Rating European Covered Bonds” methodology on 26 May 2015.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (high). Totta is the Issuer and Reference Entity for the Programme;
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with Totta’s OH Programme;
-- A Cover Pool Credit Assessment (CPCA) of BB, being the lowest CPCA in line with the CBs rating;
-- An LSF-Implied Likelihood (LSF-L) of BBB (high);
-- Two notches of uplift for high recovery prospects;
-- A level of overcollateralisation (OC) to which DBRS gives credit of 15%, being the level of OC to which the Issuer commits in the investor report. Such a level is not subject to haircut as DBRS has observed it to persist 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 (CP).

Everything else being equal, a downgrade of the CBAP by two notches would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the CBs rating by one notch.

In addition, everything else equal, the ratings of the Totta OH would be downgraded if any of the following occurs: (i) the sovereign rating of the Republic of Portugal were downgraded below BBB (low); (ii) the LSF Assessment associated with the Programme were downgraded to Modest; (iii) the quality and consistency of the CP were no longer sufficient to support two notches of uplift for high recovery prospects; or (iv) volatility in the financial markets caused the currently estimated market value spreads to increase.

As of June 2015, the cover assets amount to EUR 7.781 billion, resulting in a nominal OC of 19.71%. This is above the current Issuer commitment OC of 15.00%.

All the loans in the CP are prime residential mortgage loans, with a weighted average (WA) current unindexed loan-to-value ratio of 54.15% and a WA seasoning of 103 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.

The lead analyst responsibilities for this transaction have been transferred to Vito Natale.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating European Covered Bonds. This can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include investor reports provided by Totta. 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.

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 1 July 2015, when DBRS confirmed ratings on all OH outstanding under the Programme and maintained the Under Review with Developing Implications status.

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

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

DBRS Ratings Limited
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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 & Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda

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.