DBRS Upgrades Rating on Sagres STC (Pelican Mortgages No. 4) and Removes UR-Positive

DBRS Ratings Limited (DBRS) has today upgraded to A (high) (sf) from A (sf) the rating on the Class A Notes issued by Sagres STC (Pelican Mortgages No. 4) (the Issuer) and has removed from Under Review with Positive Implications (UR-Pos.).

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal payable on or before the Final Legal Maturity Date.

Pelican Mortgages No. 4 is a securitisation of Portuguese residential mortgages (portfolio of EUR 1 billion at closing) originated and serviced by Caixa Económica Montepio Geral (Montepio). The transaction closed in 2008 and DBRS assigned a rating to the Class A Notes in 2011.

The upgrade of the rating of the Class A Notes reflects an annual review of the transaction and concludes the UR-Pos. status of the rating. The Class A Notes were placed UR-Pos. following a material update to the methodology DBRS applies to monitor the counterparty risks of the transaction (see “Legal Criteria for European Structured Finance Transactions”, published on 19 February 2016).

This methodology incorporates DBRS’s new Critical Obligations Ratings (CORs), which were introduced in the “Critical Obligations Rating Criteria” methodology published on 2 February 2016, and also provide more granular rating levels for account bank institution replacements and eligible investments.

The rating of Class A Notes has been upgraded based upon the following analytical considerations:
-- Portfolio performance, in terms of delinquencies and default, as of the 15 March 2016 payment date.
-- Updated and more granular rating levels introduced by the “Legal Criteria for European Structured Finance Transactions” for account bank institution replacement triggers.
-- Portfolio probability of default (PD) rate, loss given default (LGD) and expected losses for the remaining collateral pool.
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the A (high) (sf) rating level.

The portfolio is performing in line with DBRS’s expectations. The current 90+ delinquency ratio as a percentage of the performing balance of the portfolio was 1.35% in March 2016 (almost stable from 1.31% in March 2015). The cumulative default ratio (as a percentage of the original balance) slightly increased during the year, reaching 0.88% in March 2016 (from 0.81% in March 2015).

Credit enhancement to the Class A Notes is provided by subordination of the Class B, C and D Notes (the Junior Notes) as well as an amortising Cash Reserve Amount. The credit enhancement to the Class A Notes is currently 24.26%, slightly decreased from 24.38% in March 2015 due to the amortisation of the Cash Reserve Amount and the amortisation of the Junior Notes.

The Cash Reserve Amount 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 down to a EUR 10 million floor. As of March 2016, it is at its target level of EUR 21.89 million.

Citibank, National Association, London Branch (Citibank, N.A. London) is the Account Bank for the transaction. DBRS’s private rating of Citibank, N.A. London complies with 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.

The Royal Bank of Scotland NV, London Branch is the swap counterparty for the transaction and its private rating complies with the Minimum Institution Rating, given the rating assigned to the Class A Notes, as described in 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 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 Citibank, N.A. London Branch and the loan by loan 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 19 February 2016, when the rating of the Class A Notes was placed UR-Pos. Prior to that, the rating of the Class A Notes was confirmed at A (sf) on 20 April 2015.

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

To assess the impact of the 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 PD and LGD for the pool based on a review of the current assets. 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 8.72% and 25.14%, respectively. The corresponding levels at the A (high) (sf) rating level are 24.12% and 40.34%.

-- 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 Class A Notes would be expected to remain at A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to decrease to A (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 BBB (low) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (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: Keith Gorman
Initial Rating Date: 24 February 2011
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Diana Turner

DBRS Ratings Limited
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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

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