DBRS Downgrades to BBB Banco Popular Portugal Mortgage Covered Bonds, Removes Under Review with Negative Implications

DBRS Ratings Limited (DBRS) has today downgraded to BBB from BBB (high) the ratings 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 removed the Under Review with Negative 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 (low), being the Senior Unsecured Long Term Debt & Deposit Rating of BPP. There is no Critical Obligations Rating associated to BPP.
-- A Legal and Structuring Framework (LSF) Assessment of Modest associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) floored at 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.

The transaction was modelled using 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.

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 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.

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.

As of December 2015, the mortgage CP comprised 10,436 mortgages with an average loan amount of EUR 83,915. The weighted-average (WA) current loan-to-value of the mortgages was 50.75% with a WA seasoning of 6.8 years. The CP was mainly distributed between Lisbon (55.3% by outstanding balance), Northern Portugal (21.96%) and Central Portugal (13.75%).

As of December 2015, the weighted-average life of the cover pool was 15.7 years based on a 0% pre-payment rate, which is longer than the 2.2 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.

DBRS has assessed the LSF related to the Programme as Modest, 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.

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 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/.

The sources of information used for these ratings 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 these ratings 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 3 March 2016, when DBRS placed Under Review with Negative Implications the ratings of all outstanding OH issued by BPP.

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: 31 August 2012
Initial Rating Committee Chair: Claire Mezzanotte

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

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