DBRS Assigns “A” Ratings to Novo Banco Conditional Pass-Through Covered Bonds Programme

DBRS Ratings Limited (DBRS) has today assigned a rating of “A” to four series of obrigações hipotecárias (OH, the Portuguese mortgage covered bonds) issued under Novo Banco Conditional Pass-Through Covered Bonds Programme (NB PT OH or the Programme). The Programme has been established in October 2015 under the Portuguese covered bond law to issue up to EUR 10 billion of OH. Novo Banco S.A. has issued OH for a total nominal amount of EUR 3.7 billion.

The rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BB (low). Novo Banco, S.A. (NB) is the Issuer and Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Adequate associated with NB PT OH.
-- A Cover Pool Credit Assessment (CPCA) of A (high), being the lowest CPCA in line with the covered bonds rating.
-- A LSF-Implied Likelihood (LSF-L) of BBB (high).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 8.9% that DBRS gives credit to, being the minimum observed OC level adjusted by a scaling factor of 0.9.

The transaction was modelled using 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 senior costs. As a deviation from its “Rating European Covered Bonds” methodology, no forced assets liquidation has been modelled for this transaction given the conditional pass-through structure. Furthermore, DBRS has assumed several prepayment scenarios ranging between 0% and 10%.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by two notches, resulting in a downgrade of the covered bonds rating by two notches. In addition, everything else being equal, the NB PT OH ratings would be downgraded if any of the following occurred: the sovereign of the Republic of Portugal were downgraded below the CBAP; or the quality and consistency of the cover pool (CP) were no longer sufficient to support a two-notch uplift for high recovery prospects.

DBRS has assessed the LSF related to the NB PT OH as “Adequate” according to its rating methodology. The “Adequate” LSF assessment assigned to NB PT OH 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 50-year maturity extension provision which, in DBRS’s stressed simulations, allows all loans in the CP to amortise fully and related recoveries to be collected, hence making the structure a pass-through; (3) the lack of any regulatory requirement to cover temporary liquidity constraints, combined with a dynamic liquidity reserve which resets on each payment date prior to an issuer event of default to a level sufficient to cover CB interests due during the subsequent three months plus EUR 100,000 as a partial coverage of other senior costs and expenses; (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 contractually funds the liquidity reserve account on a dynamic basis. The reserve account is currently held with Société Générale S.A. London Branch. 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. The cash reserve is part of the cover pool and is reported to the Bank of Portugal as available funds of the cover pool.

NB PT OH currently has EUR 3.7 billion of OH outstanding under the programme, while the cover pool is composed of EUR 50 million of Spanish Government bonds and EUR 4.014 billion of mortgages, resulting in a total OC of 9.8%. The level DBRS gives credit to is 8.9%, after applying a scaling factor of 0.90.

As at 7 October 2015, the cover pool outstanding balance was EUR 4.014 billion and comprised 82,433 residential mortgages with a weighted-average current unindexed loan-to-value ratio (LTV) of 55.5%, a weighted-average seasoning of 99 months and a weighted-average remaining time to maturity of 291 months. The pool is mainly distributed between northern Portugal (28%), Lisbon area (38%) and central Portugal (21%).

NB PT OH do not benefit from hedging agreements to cover the mismatch between the interest paid by the cover pool (98.7% floating rate linked to different indexes and reset dates), and the interest paid to the covered bond holders, linked to three months Euribor plus 25 basis points with quarterly resets. If the maturity of the bonds is extended, the outstanding series become pass-through series paying one month Euribor plus 25 basis points on a monthly basis. This risk is partly mitigated by the OC available and has been accounted for in DBRS’s cash flow model.

The weighted-average life of the assets is roughly fifteen years, whereas the current weighted-average life of the OH is roughly four-and-a-half years, not accounting for any extension of maturity. All cover pool assets are denominated in euros, as well as all covered bonds. As such, investors are not currently exposed to any foreign exchange risk.

For further information on NB PT OH, please refer to the rating report available on www.dbrs.com.

DBRS has assessed the LSF related to Novo Banco Conditional Pass-Through Covered Bonds Programme as Adequate 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 2015). 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 loan by loan data tables provided by Novo Banco S.A. 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 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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on the Novo Banco Conditional Pass-through Covered Bonds 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: 15 December 2015
Initial Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
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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 and Banking Organisations
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- The Effect of Sovereign Risk on Securitisations in the Euro Area
-- Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings

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

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.