DBRS Upgrades Caixa Económica Montepio Geral Covered Bonds to A (high) Upon Restructuring in CPT, Removes UR-D

DBRS Ratings Limited (DBRS) has today upgraded to A (high) from “A” the ratings on the EUR 2 billion of Obrigações Hipotecárias (OH, the Portuguese legislative covered bonds) issued under Caixa Económica Montepio Geral (Montepio or the Issuer) Covered Bonds Programme. Concurrently, the ratings were removed from the Under Review with Developing Implications status, following completion of a full review cycle.

The upgrade to A (high) follows the restructuring of the programme in a Conditional Pass-Through (CPT) structure, as approved by a meeting of OH holders held on 1 July 2016. The ratings are based upon the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BB (high). Montepio is the Issuer and Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Adequate associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A (high), being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (low).
-- A two-notch uplift for high recovery prospects.
-- A committed minimum overcollateralisation of 18%, down from the previous level of 35%. DBRS gives full credit to such commitment in accordance with its methodology. Such level is not subject to a haircut, as DBRS has observed it has been historically persistent for the past 24 months.

The transaction was modelled with the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets and interest rate stresses.

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 to “A”.

In addition, the ratings of the Programme would be downgraded if any of the following occurs: (1) the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for good recovery prospects, or (2) the CPCA were downgraded below A (high).

The ratings on the covered bonds (CBs) were placed Under Review with Negative Implications on 9 February 2016, following publication on 4 February 2016 of a Request of Comments for the “Rating European Covered Bonds” methodology that proposed a new analysis for the determination of the CBAP. On 18 March 2016, as part of the consolidated results announcement, Montepio announced its intention to restructure the Programme in a CPT structure. On 28 April 2016, DBRS placed the OH ratings Under Review with Developing Implications as it was expecting that, provided sufficient mitigating features were incorporated in the CPT structure, the rating could be upgraded but, in the absence of a restructuring, the ratings could be downgraded.

As a result of the restructuring, the extended maturity dates have been rescheduled from a 12-month extension period (which is standard in Portuguese soft-bullet OH) to an extension period that varies between 43 and 46 years and which, in DBRS’s analysis, is sufficient for the cover pool, adjusted for defaults and recovery assumptions, to fully amortise.

In the context of the restructuring, a dynamic reserve (to be replenished on each payment date) has been set up with Elavon Financial Services Ltd, UK branch, for an amount at least equal to the amount due and payable during the next three months as senior costs, hedging payments and interest on the CBs, also under the assumption that some or all of the Series were to switch to pass-through during this three-month period. The reserve is segregated for the benefit of OH holders. Such a reserve can be replaced, at Issuer’s option, with a liquidity facility of an equivalent size.

According to the updated contractual structure, following a Default of Payment Event (non-payment of principal or interest on an OH when due) each affected OH will switch to pass-through format, and following an Insolvency Event (winding-up of the Issuer) or a Breach of OC Percentage (for two consecutive reporting dates), all OH will become pass-through.

The “Adequate” LSF Assessment reflects DBRS’s view of: (1) the satisfactory level of segregation provided by the OH legal framework and the CB holders’ first priority right on the cover pool (CP), in combination with possible residual commingling risk as addressed by DBRS; (2) the maturity extension provision (up to 46 years) which, in DBRS’s stressed simulations, allows all loans in the CP to amortise fully and related recoveries to be collected, hence making the structure a pass-through following an assumed insolvency event of the issuer; (3) the lack of any regulatory requirement to cover temporary liquidity constraints, combined with a contractual dynamic liquidity reserve which resets on each payment date prior to an Issuer Event to a level sufficient to cover senior expenses, swap payments and CB interests due during the subsequent three months; (4) the role of Bank of Portugal in the supervision of the Portuguese OH, combined with the high penetration of the OH as a funding tool for Portuguese banks in a BBB (low) Host Sovereign, and the role of the asset monitor that only reports to the regulator indirectly.

As at 31 March 2016, the cover pool had a total outstanding balance of EUR 2,725,783,800. The available overcollateralisation (OC) is 36.29%, which is above the current Issuer commitment OC of 18%.

As of March 2016, the weighted-average current unindexed loan-to-value of the mortgages was 54.12%.

Fixed-rate mortgages in the cover pool accounted for 5.6% of notional, whilst floating-rate mortgages represented 94.4% of CP balance, and mortgages in the pool are indexed to different bases and reset at different times. OH are indexed to a mix of one- and three-month Euribor. A cover pool swap entered into between the Issuer and the Royal Bank of Scotland plc, partly hedges the basis risk. However, DBRS gives no credit to such swap in its cash flow analysis, as the replacement language is not in line with its methodologies.

All cover assets are denominated in euros, as are all covered bonds. As such, investors are not currently exposed to any foreign exchange risk.

For more information, please refer to DBRS’s commentary “Portuguese Covered Bonds: Legal and Structuring Framework Review,” available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating European Covered Bonds (March 2016). This can be found on www.dbrs.com at http://www.dbrs.com/about/methodologies. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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 the Issuer. 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.

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.

The last rating action on this programme took place on 28 April 2016, when DBRS placed the rating of this programme Under Review with Developing Implications, following announcement by the Issuer of its intention to restructure in CPT structure.

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, Senior Vice President
Initial Rating Date: 30 November 2011
Initial Rating Committee Chair: Claire Mezzanotte, Global Managing Director

Lead Analyst: Vito Natale, Senior Vice President
Rating Committee Chair: Quincy Tang, Managing Director

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.

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Critical Obligations Rating Criteria
-- Global Methodology for Rating Banks and Banking Organisations
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- 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
-- 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.