DBRS Upgrades Rating on GAMMA - Sociedade de Titularização de Créditos, S.A. (Azor 2)

DBRS Ratings Limited (DBRS) has today upgraded to AA (sf) from A (high) (sf) the rating on the Class A Mortgage-Backed Floating Rate Notes (the Class A Notes) of GAMMA – Sociedade de Titularização de Créditos, S.A. (Azor 2).

The upgrade of the rating of the Class A Notes is based upon the following analytical considerations:
-- Portfolio performance, in terms of delinquencies and defaults, as of the January 2016 payment date.
-- Updated portfolio default rate, loss given default and expected loss assumptions for the remaining collateral pool.
-- Incorporation of a sovereign-related stress component to address the impact of macroeconomic variables on collateral performance given the long-term foreign and local currency rating of BBB (low) for the Republic of Portugal.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms in which they have invested;
-- The current available credit enhancement to the Class A Notes to cover expected losses assumed in line with an AA (sf) rating level.

The rating of the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Legal Maturity Date.
GAMMA – Sociedade de Titularização de Créditos, S.A. (Azor 2) is a securitisation of Portuguese residential mortgage loans originated by Banif – Banco Internacional do Funchal, S.A. (Banif) and closed in July 2008. On 20 December 2015, the contractual position of Banif in this transaction has been transferred to Banco Santander Totta, S.A. following the resolution measure applied to Banif and the consequent acquisition by Banco Santander Totta, S.A. of a set of rights and obligations of Banif. DBRS has received confirmation that there has not been any disruption on servicing activity. DBRS will continue to closely monitor the evolution of this contractual position transfer and any potential impact on the transaction.

The assets supporting the notes are first-ranking loans over residential properties located in Portugal. The transaction follows the Sociedade de Titularização de Créditos (STC) arrangement under the Portuguese Securitisation Decree-Law 453/99.

The mortgage pool is well seasoned (over ten years) and it is geographically concentrated on the islands of the Azores. Additionally, about 49% of the current pool was originated in 2006 and 2007.

The portfolio is performing in line with DBRS’s expectations. The 90+ delinquency ratio (excluding defaulted loans) as a percentage of the performing balance of the portfolio is at 1.06% as of the January 2016 payment date. The gross cumulative written-off ratio is 2.21% of the original portfolio balance. This is below DBRS’s base case default rate of 16.22%.

The Class A Notes are supported by the Class B Notes and an amortising Cash Reserve (currently equal to 3.67% of the Class A and Class B Notes outstanding principal balance). The credit enhancement for the Class A Notes increased to 26.72% in January 2016, up from 25.15% in January 2015.

The Cash Reserve is available to protect the Class A Notes against both interest and principal shortfalls on an ongoing basis. It is allowed to amortise over the life of the transaction if certain conditions are satisfied. The Cash Reserve is currently at the initial and target level of EUR 6.75 million.

HSBC Bank plc is the Account Bank for this transaction. DBRS’s private rating of HSBC Bank plc is at least equal to the Minimum Institution Rating given the rating assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology. Additionally, The Royal Bank of Scotland plc is the Swap Counterparty for this transaction. The swap documentation contains rating triggers related to collateralisation, replacement or the inclusion of an appropriately rated guarantor if breached consistent with DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the “Master European Structured Finance Surveillance Methodology”. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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

The sources of information used for this rating include investor reports provided by HSBC Bank plc and data from the European DataWarehouse GmbH.

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 transaction took place on 13 March 2015, when DBRS confirmed the rating of the Class A Notes at A (high) (sf). The lead responsibilities for this transaction have been transferred to Vito Natale.

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

To assess the impact of 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):

-- DBRS expected a lifetime base case Probability of Default (PD) and Loss Given Default (LGD) for the pool based on a review of the current receivables. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.

-- The base case PD and LGD of the current pool of mortgages for the Issuer are 16.22% and 11.39%, respectively. At the AA (sf) rating level, the corresponding PD is 41.43% and the LGD is 25.00%.

-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Class A Notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both PD and LGD increase by 50%, the rating of the Class A Notes would be expected to decrease to AA (low) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (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: Alastair Bigley
Initial Rating Date: 8 July 2011
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Mary Jane Potthoff

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

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

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