DBRS Assigns “A” Rating to Novo Banco S.A. Conditional Pass-Through Series 5

DBRS Ratings Limited (DBRS) has today assigned a rating of “A” to the Obrigações Hipotecárias (OH, the Portuguese legislative covered bonds) newly issued under the Novo Banco S.A. (Novo Banco, or the Issuer) Conditional Pass-Through Covered Bond Programme (NB PT OH or the Programme). Series 5 has a nominal amount of EUR 450 million, an expected maturity of seven years and a floating-rate coupon linked to Euribor 3 months + 0.25%. The final maturity date falls in December 2066.

Concurrently, DBRS has confirmed the “A” ratings on the other OH outstanding under the programme.

The “A” ratings assigned to Novo Banco CPT reflect the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of BB (low). Novo Banco is the Issuer and Reference Entity (RE) for the Programme. There is a Long Term Critical Obligations Rating (LT COR) assigned to the RE. DBRS does not consider OH to be a systemically important financing tool in Portugal; however, DBRS considers the assets in the programme are strategic to the core activity of the RE.

-- A Legal and Structuring Framework (LSF) assessment of Adequate associated with NB PT OH.

-- A Cover Pool Credit Assessment (CPCA) of A (high), being the lowest CPCA in line with the A LSF-Implied Likelihood (LSF-L).

-- A LSF-L of BBB (high).

-- A two-notch uplift for high recovery prospects.

-- A level of overcollateralisation (OC) of 8.9% to which DBRS gives credit, being the minimum observed OC level adjusted by a scaling factor of 0.9. The OC available at 15 December 2016 was 10.1%.

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, and interest rate stresses. In accordance with the “Rating European Covered Bonds” methodology, no forced asset liquidation has been modelled for this transaction given the conditional pass-through structure, and DBRS has assumed several prepayment scenarios ranging from 1% to 10%.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by two notches, resulting in a downgrade of the covered bonds rating by two notches. In addition, everything else being equal, the CB ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below A (high); (2) the LSF assessment associated with the programme was downgraded; or (3) the quality and consistency of the cover pool (CP) was no longer sufficient to support a two-notch uplift for high recovery prospects.

DBRS has assessed the LSF related to the NB PT OH as Adequate according to its rating methodology. For more information on the LSF assessment linked to NB PT OH, please refer to the surveillance report available at www.dbrs.com.

NB PT OH currently has EUR 4.15 billion of OH outstanding under the programme, while as at 15 December 2016 the CP was composed of EUR 2.025 million of Spanish Government bonds, EUR 27 million of Italian Government bonds, and EUR 4.54 billion of mortgages, for a total CP amount of EUR 4.57 billion and a nominal OC of 10.1%. The OC level to which DBRS gives credit is 8.9%, after applying a scaling factor of 0.90 to the minimum level of OC observed during the last 12 months.

As at 15 December 2016, following a top-up, the cover pool outstanding balance was EUR 4.54 billion and comprised 95,901 residential mortgages with a weighted-average current unindexed loan-to-value ratio (LTV) of 55.7%, a weighted-average seasoning of 104 months and a weighted-average remaining time to maturity of 286 months. The pool is mainly distributed between the Lisbon area (39.6%), Northern Portugal (27.6%) and Central Portugal (20.4%).

NB PT OH do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (95.8% floating rate linked to different indexes and reset dates) and the interest paid to the CB holders, linked to three-months Euribor plus 25 basis points with quarterly resets. If the maturity of the bonds is extended, the outstanding series become pass-through paying one-month Euribor plus 25 basis points on a monthly basis. This risk is partly mitigated by the OC available and has been accounted for in DBRS’s cash flow model.

The weighted-average life of the assets is roughly 13 years, whereas the current weighted-average life of the OH is roughly three-and-a-half years, not accounting for any extension of maturity. All cover pool assets are denominated in euros, as well as all covered bonds. As such, investors are not currently exposed to any foreign exchange risk.

For further information on NB PT OH, please refer to the rating report available on www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is: “Rating European Covered Bonds” (December 2016).

In DBRS’s opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, an asset analysis was not conducted. A review of the transaction legal documents was limited to the documentation pertaining to the issuance of Series 5. All the other 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.

These 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 historical default performance data and CP loan-by-loan data tables provided by Novo Banco, S.A. that allowed DBRS to further assess the portfolio.

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 to be 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 5 December 2016, when DBRS confirmed the ratings on the OH at “A” following the completion of the full review of the Programme.

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

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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.

Lead Analyst: Vito Natale, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Senior Vice President
Initial Rating Date: 15 December 2015

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)
-- 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
-- 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