DBRS Assigns Ratings to BBVA Portugal RMBS No.1

DBRS Ratings Limited (DBRS) has today assigned a rating of A (sf) to the €1,012,000,000 floating rate mortgage-backed Notes issued by TAGUS – SOCIEDADE DE TITULARIZAÇÃO DE CRÉDITOS, S.A. (the Issuer).

BBVA Portugal RMBS No.1 is a Securitisation of first lien residential mortgage loans originated and serviced by Banco Bilbao Vizcaya Argentaria (Portugal) S.A. (BBVA Portugal). Banco Bilbao Vizcaya Argentaria, S.A. (BBVA Spain) is in place as the backup servicer. The mortgage portfolio was sold to the Issuer in accordance with Portuguese securitisation law. The issuance of Class A and Class B Notes were used to fund the purchase of the mortgage portfolio at closing. The Class C notes were issued to establish the General Reserve and the Set-Off Reserve and cover Issuer expenses at closing. The transaction is managed by Deutsche Bank AG, London Branch (the Transaction Manager).

Credit Enhancement to the Class A Notes is provided by subordination of the Class B Notes and the amounts available through the General Reserve. The Class A credit enhancement is equal to 10.83%, which consists of the Class B notes at 8% and the General Reserve at 2.83%. The Class A Notes benefit from sequential amortisation whereby the senior most outstanding class of notes must be paid in full before the Class B Notes begin to amortise. The Class C notes will amortise in accordance with the reserve fund amortisation triggers.

The General Reserve may amortise after 50% of the Class A Notes have been repaid. There is no amortisation of the General Reserve if the 90+ arrears rate is greater than 1% of the outstanding pool balance. The required balance of the General Reserve is equal to 3% of the outstanding balance of the Class A Notes outstanding with a floor of 1.50% of the aggregate balance of the initial Class A and Class B Notes.

The mortgage loans are secured against residential property in Portugal. The collateralized properties also secure second lien mortgage loans outside of the securitised portfolio. Loans outside of the portfolio have been included in the borrower default analysis. The Weighted Average Current Loan-to-Value (WACLTV) of the portfolio, including loans outside the securitisation, is 62.17%. The mortgage portfolio is 6.74 years seasoned with 65.72% of the mortgage portfolio originated between 2009 and 2014. Originations at the peak of the mortgage market (2005–2008) represent 26.19% of the portfolio. 6.76% of the mortgage loans have been granted for the purposes of construction. The definition of construction applies to two scenarios: (i) loan for the purpose of improving existing properties and (ii) loan for the construction of a new home. Such mortgage loans were treated as debt/equity mortgages. Of the mortgage portfolio, 9.84% contains borrowers with a self-employed status.

BBVA Portugal allows for certain contractual loan modifications on their mortgage products. Loan modifications on BBVA Portugal originated loans are granted to borrowers that are current on their payment and, in most cases, at the discretion of BBVA Portugal. The mortgage products allow for the following modifications:

-- Option to switch from a floating rate to a fixed rate of interest and vice versa. Borrowers are able to fix the interest rate for a period of three years, at the end of which they can choose to fix again or pay a floating rate of interest. The fixed rate payable is equal to the average Bank of Portugal mortgage rate plus the margin on the loan.

-- Option to reduce the margin as a result of cross-selling other financial products, such as credit cards, debit cards, insurance and pension schemes. The margin reduction ranges between 20 basis points (bp) and 30 bp.

-- Option to Reduce or extend the term to maturity. The terms of the product types provide the borrower with the option to increase or reduce their maturity up to ten years. With respect to a maturity extension, the increase is subject to the maximum term to maturity not exceeding 40 years from the origination date.

-- Option to pay part of the loan as a balloon payment at maturity. Some of the mortgage products provide the option to allow them to pay principal at maturity of the loans (maximum 50%) with scheduled interest payments due are calculated on the full outstanding loan amount.

-- Option of a payment holiday. Borrowers have the option to defer their scheduled payments. A borrower can choose to either, depending on the product type, postpone up to three installments a year, up to a maximum of 12 installments during the life of the loan, or postpone up to two installments a year with a maximum of ten installments during the life of the loan.

As of the pool cut-off date, 87.55% of the securitised pool have mortgage products with the flexibility features outlined above. DBRS applied stresses to certain flexible loan features in the default and cash flow assumptions.

The transaction is exposed to unhedged basis risk as a result of a mismatch between the interest rate generated from the mortgage assets and interest payable on the liabilities. The interest rate payable on the bonds is linked to 3M Euribor, with the mortgage interest rates linked to 3M and 6M Euribor. Basis risk is limited to the mortgage loans linked to 6M Euribor, which represents 5.90% of the pool. All loans linked to 6M Euribor reset on a semi-annual basis.

In accordance with Portuguese securitisation law in the event the servicer becomes insolvent, amounts held by the servicer, in respect of mortgage loans assigned to the issuer, will not form part of the servicer’s insolvency estate. Mortgage payments are collected by the servicer under direct debit scheme into the Proceeds Account Bank and are transferred daily to the Issuer Account Bank, held with Citibank N.A., London Branch. In addition backup servicing will be performed by BBVA Spain, which shares a common IT platform with BBVA Portugal for seamless exchange of information. The Amounts standing to the credit of the issuer account may be invested in eligible investments. The conditions outlined in the transaction documents are in line with DBRS legal criteria.

Borrowers in the securitised pool have bank accounts at BBVA Portugal. Set off in accordance with Portuguese Securitisation law is limited, as amounts available for set-off are crystalised at the point the loans are assigned to the issuer. DBRS calculates the set off risk in the transaction at 5%. Set-off risk is mitigated via the set-off reserve equal to 5.55% of the collateral balance.

Following a breach of the mortgage loan representations and warranties, the originator will indemnify the issuer against any losses suffered as a result of such breach. An alternative option available is to substitute the relevant mortgage loans with a new loan. All substituted loans must comply with the eligibility criteria of the mortgage portfolio as well as the substituted loan criteria.

The DBRS rating on the Class A notes addresses the timely payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the notes. DBRS based the ratings primarily on:

--The transaction's capital structure and the form and sufficiency of available credit enhancement. Class A credit enhancement is equal to 10.83% of the collateral balance. Credit enhancement for the Class A Notes is provided in the form of subordination of the Class B Notes (8.00%) and the General Reserve (2.83%).

--The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated probability of default, loss given default and expected loss outputs on the mortgage loan portfolio.

-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A Notes according to the terms of the transaction documents. The transaction cash flows were modelled using portfolio default rates and loss given default outputs provided by the DBRS European RMBS Default Model.

-- The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS Legal Criteria for European Structured Finance Transactions methodology.

Notes:
All figures are in euros unless otherwise noted. The principal methodology applicable is Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda.

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 Banco Bilbao Vizcaya Argentaria (Portugal) S.A. and Whitestar Asset Solutions, S.A.

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. This is the first DBRS rating on this financial instrument.

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

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

The Probability of Default (PD) of 20.00% and Loss Given Default (LGD) of 27.13% corresponding to the A (sf) rating scenario, were stressed assuming a 25% and 50% increase on the base case PD and LGD.

DBRS concludes the following impact on the Class A Notes:

-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to maintaining the Class A Notes at A (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to maintaining the Class A Notes at A (sf).
-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to maintaining the Class A Notes at A (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to maintaining the Class A Notes at A (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to maintaining the Class A Notes at A (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf).

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: Asim Zaman
Initial Rating Date: 31 December 2015
Initial Rating Committee Chair: Diana Turner
Lead Surveillance Analyst: Andrew Lynch

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

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model for European Securitisations
-- Operational Risk Assessment for European structured Finance Originators
-- Legal Criteria for European Structured Finance Transaction

A description of how DBRS analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.