DBRS Upgrades Novo Banco Soft Bullet to BBB, Removes Under Review with Developing Implications

DBRS Ratings Limited (DBRS) has today upgraded its rating on the Series 6 obrigações hipotecárias (OH, the Portuguese legislative covered bonds) issued under Novo Banco, S.A.’s (Novo Banco, or the Issuer) OH Programme (the Programme) to BBB from BBB (low). Concurrently, the rating was removed from the Under Review with Developing Implication status.

This follows the completion of a full review process as of today. Series 6 OH has a current outstanding amount of EUR 40 million and is placed with investors.

The rating of the covered bonds was initially placed Under Review with Developing Implications on 5 August 2014 after a similar action on the Issuer Rating and following the creation of Novo Banco, S.A. from the previous Banco Espirito Santo S.A. The rating on the covered bonds was subsequently maintained Under Review with Developing Implications on 17 December 2014 with the implementation of the new methodology “Rating European Covered Bonds” (December 2014). Following the publication of the Request for Comments on the “Rating European Covered Bonds” methodology (May 2015, subsequently finalized in September 2015), which introduced a new method to derive the Covered Bonds Attachment Point, the ratings remained Under Review with Developing Implications.

The Issuer was downgraded to B from BB (low) in September 2015, and subsequently set up a new covered bond programme that features a conditional pass-through structure, with a substantial transfer of assets from this Programme and concurrent repayment on 7 October 2015 of Series 4, 5, and 7 OH for a total of EUR 3 billion.

This rating action follows the completion of a full review, with analysis of the cover pool assets that are backing the Programme as at 30 November 2015.

The BBB rating assigned to Novo Banco OH reflects the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of BB (low). Novo Banco is the Issuer and the Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BB, being the lowest CPCA in line with the final covered bond rating.
-- An LSF-Implied Likelihood (LSF-L) of BB (high).
-- A two-notch uplift for high recovery prospects.
-- A minimum overcollateralisation (OC) of 32% that the Issuer commits to in its investors report. DBRS gives full credit to such commitment as it has been observed as persistent during the last 24 months. The OC currently available is 32.5%.

The transaction was modelled with DBRS’s European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets and interest rate stresses as well as market value spreads to calculate liquidation values on the CP.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the covered bonds rating by one notch. In addition, the ratings of the Programme would be downgraded if any of the following occurred: (1) the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects, (2) the LSF Assessment associated with the Programme were downgraded or (3) the sovereign rating of the Republic of Portugal were downgraded below BBB (low).

DBRS has assessed the LSF related to Novo Banco 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.

As of the end of November 2015, the cover pool (CP) included EUR 53 million of first- and second-ranking residential mortgage loans. The mortgage CP comprised 1,606 residential mortgages granted to individuals with an average loan amount of EUR 33,001.

The weighted-average current loan-to-value of the mortgages was 50.81% with a seasoning of 7.4 years. The CP was mainly distributed between Lisbon (40.1% by outstanding balance), Northern Portugal (32.0%) and Central Portugal (16.6%).

The CP comprised mainly floating-rate loans (98.2% by outstanding balance). Series 6 OH pays a fixed-rate coupon. The resulting interest rate mismatch is hedged via an interest rate swap with Credit Agricole CIB. The DBRS private rating of Credit Agricole CIB is in line with the minimum counterparty rating according to the “Rating European Covered Bonds” methodology and the “Derivative Criteria for European Structured Finance Transactions.”

All CP assets are denominated in euros, as are the OH. As such, investors are not currently exposed to any foreign exchange risk.

As of the cut-off date, the weighted-average life of the cover pool was 10.3 years based on a 0% pre-payment rate, which is longer than the 1.2-year weighted-average life on the OH when taking into account the expected maturity. This risk is partly mitigated by the OC available and the 12 months maturity extension.

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. A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

Other methodologies and criteria 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 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 the Issuer 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.

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 7 October 2015, when DBRS discontinued the ratings of the Series 4, 5 and 7 OH.

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

Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Diana Turner

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 used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Unified Interest Rate Model for European Securitisations
-- Rating European Covered Bonds
-- Global Methodology for Rating Banks and Banking Organisations

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.