DBRS Upgrades to A (high) Ratings on Caixa Geral de Depósitos Covered Bonds, Removes Under Review with Positive Implications

DBRS Ratings Limited (DBRS) has today upgraded to A (high) from “A” the ratings on the Obrigações Hipotecárias (OH or the Portuguese legislative covered bonds) issued under the Caixa Geral de Depósitos (CGD or the Issuer) Covered Bond Programme. There are EUR 7,001,450,000 OH outstanding under the Programme, EUR 1.5 billion of which is retained. Concurrently, the ratings have been removed from the Under Review with Positive Implications status.

The rating actions reflect a material update to the methodology DBRS uses to rate and monitor European covered bonds. The Methodology supersedes the previous “Rating European Covered Bonds” methodology published on 15 December 2015.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (high), being the Long-Term Critical Obligations Rating of CGD. CGD 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 BBB (low), being the lowest CPCA in line with the final covered bond rating.
-- An LSF-Implied Likelihood (LSF-L) of A (low).
-- A two-notch uplift for high recovery prospects.
--A level of overcollateralisation (OC) of 38.5% to which the Issuer commits in the investor report, and a reduced level DBRS considers sustainable based on discussions with the issuer and expected market developments.

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 two notches would lead to a downgrade of the covered bonds rating by one notch. In addition, the ratings of the OH would be downgraded if any of the following occurred: (1) the CPCA were downgraded below BBB (low), (2) the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects, (3) the LSF Assessment associated with the Programme were downgraded, (4) the sovereign rating of the Republic of Portugal were downgraded below BBB (low), (5) the relative amortisation profile of OH and CP moved adversely or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

The total outstanding amount of OH is EUR 7.00 billion, while the aggregate balance of the mortgages in the cover pool is EUR 10.60 billion, including EUR 126.78 million of eligible securities, resulting in a total OC of 51.44% which is above the committed level of 38.5%.

As of December 2015, the mortgage CP comprised 241,510 residential mortgages granted to individuals with an average loan amount of EUR 43,378. The weighted-average current loan-to-value of the mortgages was 51.4% with a seasoning of 9.9 years. The CP was mainly distributed between Lisbon (33.4% by outstanding balance), Northern Portugal (27.2%) and Central Portugal (22.1%).

99.93% of the loans pay a floating interest rate, indexed to Euribor, while 70.4% of the covered bonds are fixed rate. No swaps are in place to mitigate such mismatch, and this has been accounted for in DBRS’s modelling.

As of December 2015, the weighted-average life of the cover pool was 13.6 years based on a 0% pre-payment rate, which is longer than the 3.7 years weighted-average life on the OH when taking into account the expected maturity. This risk is partly mitigated by the OC available and partly by a 12-month extendable maturity feature by which, should the Issuer default on its payment on the Covered Bonds at the respective expected maturity date, the covered bond maturities are automatically extended on a monthly basis up to 12 months.

DBRS has assessed the LSF related to CGD OH as Average according to its rating methodology. For more information, please refer to DBRS’s “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review” commentaries, both available at www.dbrs.com.

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

For further information on CGD OH, please refer to the rating report that is available on 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. In DBRS’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, an asset analysis and an operational risk review were not conducted. 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 these ratings 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 actions on this transaction took place on 9 February 2016, when DBRS placed the ratings of CGD OH Under Review with Positive Implications.

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: 10 September 2012
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
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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
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Global Methodology for Rating Banks and Banking Organisations
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- 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
-- Rating CLOs and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
-- Unified Interest Rate Model Methodology for European Securitisations
-- 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 analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375