DBRS Assigns “A” Rating to Santander Totta Covered Bonds, Series 16

DBRS Ratings Limited (DBRS) has today assigned an “A” rating to Series 16 of obrigações hipotecárias (OH, the Portuguese legislative covered bonds) issued under the Banco Santander Totta (Totta or the Issuer) EUR 12.5 billion OH Programme (the Programme). Series 16 is a EUR 450,000,000 fixed-rate bond maturing in February 2021.

Concurrently, DBRS has confirmed its “A” rating on the other OH outstanding under the Programme. Following the issuance of Series 16, there are ten series of OBG outstanding under the Programme for a total nominal amount of EUR 6.95 billion.

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 its persisting for the past 24 months.

DBRS released Critical Obligations Rating (COR) Criteria on 2 February 2016 and assigned COR ratings to those banks that have the necessary characteristics on 4 February 2016. The COR addresses the risk of default of particular obligations/exposures at certain banks that are considered critical and have a higher probability of being excluded from bail-in and remaining in a continuing bank in the event of the resolution of a troubled bank than other senior unsecured obligations, such as can occur under the implementation of the Bank Recovery and Resolution Directive (BRRD). As of today, a COR has not been assigned to Banco Santander Totta; however, the senior unsecured rating of Totta is BBB (high), being the same as the CBAP.

DBRS published a request for comments for its “Rating European Covered Bonds Methodology” on 4 February 2016, which proposes a new analysis for deriving the CBAP of those European Programmes that have a Reference Entity (RE) that is subject to the BRRD. The proposed method involves the use of the RE’s COR alongside the current senior unsecured rating (RE-SUR) as a reference rating for the CBAP and the possibility of notching the rating of CBAP down by up to one notch from the COR or up by up to two notches above RE-SUR in certain circumstances.

Everything else being equal, should the request for comments be approved in the proposed form, DBRS expects no impact on the ratings of the OH issued under The Programme.

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: (1) the sovereign rating of the Republic of Portugal were downgraded below BBB (low); (2) the LSF Assessment associated with the Programme were downgraded to Modest; (3) the quality and consistency of the CP were no longer sufficient to support two notches of uplift for high recovery prospects; or (4) volatility in the financial markets were to cause the currently estimated market value spreads to increase.

As of February 2016, the cover assets amount to EUR 8.10 billion, resulting in a nominal OC of 16.6%. This is above the current Issuer commitment OC of 15.0%.

All the loans in the CP are prime residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 55.1% and a WA seasoning of 104 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.

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.

The last rating action on this transaction took place on 27 October 2015, when DBRS confirmed ratings on all OH outstanding under the Programme and removed 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
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.

-- 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.