DBRS Places Banco Popular Portugal Mortgage Covered Bonds Under Review with Negative Implications

DBRS Ratings Limited (DBRS) has today removed the Under Review with Developing Implications status previously assigned to its BBB (high) rating on the Obrigações Hipotecárias (OH or the Portuguese legislative covered bonds) issued under the Banco Popular Portugal (BPP or the Issuer) Mortgage Covered Bonds Programme (the Programme) and subsequently placed the rating Under Review with Negative Implications. The rating actions follow the publication of the Critical Obligations Rating Criteria on 2 February 2016 and a request for comments on the Rating European Covered Bonds Methodology on 4 February 2016.

The BBB (high) ratings of the OH were placed Under Review with Developing Implications on 26 May 2015, following (1) the 20 May 2015 announcement that DBRS was reconsidering the credit it gave to sovereign support in the ratings of the European banks and the placement Under Review with Negative Implications status of the senior debt and deposit rating of Banco Popular Portugal and (2) the publication of a request for comments on the Rating European Covered Bonds methodology, which proposed an updated analysis for the determination of the Covered Bonds Attachment Point (CBAP).

DBRS published the Critical Obligations Rating Criteria on 2 Feb 2016 and assigned a Critical Obligations Rating (COR) to 33 European Banking groups on 4 Feb 2016. In that circumstance, Banco Popular Portugal was not assigned a COR.

Also on 4 February 2016, DBRS published a request for comments on the Rating European Covered Bonds methodology, proposing a more advanced analysis for the determination of the CBAP, which involves the use of the COR, where applicable. At that time, the Under Review with Developing Implications status on the Banco Popular Portugal OH ratings was not affected.

As noted in the Critical Obligations Rating Criteria, DBRS might assign a COR to critical subsidiaries (international and domestic), but would typically expect an international subsidiary to fulfil the COR requirements in its own market (that is, to be large, complex and systemically important). After careful consideration, DBRS is not assigning a COR to Banco Popular Portugal at this time. This view may evolve, as DBRS may witness future applications of BRRD in the European banking sector.

As explained in the commentary “DBRS’s Assessment of European Jurisdictions for Which Covered Bonds are Systemically Important,” published on 8 September 2015, DBRS currently does not consider Portugal to be a jurisdiction where Covered Bonds are a particularly important funding instrument. Even if this view were to change, it remains unlikely that the CBAP would be set above the sovereign rating of the relevant jurisdiction when the senior unsecured rating of the reference entity, or the COR where applicable, is not itself above the sovereign rating.

Everything else being equal, DBRS expects that if the request for comments on the Rating European Covered Bonds methodology is approved in the proposed form, the ratings of the Banco Popular Portugal OH may be downgraded to BBB from BBB (high) currently, based on the following analytical considerations:

-- BPP is the Issuer and Reference Entity (RE) for the programme.
-- BPP is not assigned a COR and DBRS does not consider Portugal to be a jurisdiction where Covered Bonds are a particularly important funding instrument.
-- A Covered Bonds Attachment Point (CBAP) may be set at BBB (low), being the Senior Unsecured Long Term Debt & Deposit Rating of BPP.
-- A Legal and Structuring Framework (LSF) Assessment of Modest is associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) of BBB (low). In DBRS’s view, the Programme’s LSF-L is limited by the CBAP due to insufficient historical performance data for DBRS to form a view on the timeliness of cash flows deriving from the Cover Pool (CP) in case of an assumed default of BPP.
-- One-notch uplift for good recovery prospects. DBRS has formed a view on the availability and sufficiency of the CP to satisfy the claims of the OH holders in a post-issuer insolvency scenario.
-- The minimum legislative overcollateralisation (OC) of 5.26% envisaged for Portuguese OH.

DBRS has assessed the LSF related to the Programme as Modest, 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 total outstanding amount of securities under the Programme is EUR 815 million. As of the end of December 2015, the CP balance is EUR 875 million, including 83.80% residential and 16.20% commercial mortgages. The nominal OC is 7.45%, above the legislative minimum OC.

Following a wind-down cash flow simulation aimed at covering the cost of funding under a stress scenario, which yielded good recovery prospects on the OH, a one-notch uplift from the LSF-L could be granted.

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

In addition, everything else being equal, the ratings of the OH would be downgraded if the quality and consistency of the cover pool were no longer sufficient to support a one-notch uplift for good recovery prospects.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating European Covered Bonds.

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release. This can be found 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 at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

This is an event-driven rating action and not all sections of the methodology were applied. A review of the transaction’s legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

The sources of information used for this rating include stratification information on the CP provided by the Issuer.

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.

The last rating action on this Programme took place on 28 September 2015, when, upon completion of a full review of the programme, DBRS assigned a BBB (high) rating to Series 7, placed it Under Review with Developing Implications, and maintained the Under Review with Developing Implications status on the Series 5 and 6.

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

This rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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: 31 August 2012
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Erin Stafford

DBRS Ratings Limited
1 Minster Court, 10 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 and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model Methodology for European Securitisations

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.