DBRS Maintains Banco BPI S.A. Covered Bonds Under Review with Developing Implications

DBRS Ratings Limited (DBRS) has today maintained the status of Under Review with Developing Implications for the A (high) ratings on the outstanding Obrigações Hipotecárias (OH; the Portuguese mortgage covered bonds) issued under Banco BPI, S.A.’s (BPI or the Issuer) Covered Bonds Programme (the Programme).

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) that reflects BPI’s likelihood that the source of payments will switch from the Reference Entity to the Cover Pool (CP). BPI is the Issuer and Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with the Programme.
-- A CP Credit Assessment (CPCA) of “A,” which is 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 level of overcollateralisation (OC) of 32.5% to which DBRS gives full credit and to which the Issuer commits in the investor report.

The ratings of the BPI covered bonds were initially placed Under Review with Developing Implications on 14 July 2016 because of potential changes involving the Issuer that could affect the CBAP, which mirrors the strength of the Reference Entity as a primary source of payments for the covered bonds. Among other considerations, the Under Review status reflected uncertainties surrounding the potential changes in the ownership structure of BPI.

DBRS has today maintained the Under Review status on the covered bonds as the conditions that led to the assignment of the Under Review status in July are still in the process of being resolved. On 26 September 2016, DBRS published a commentary on CaixaBank, S.A.’s capital increase and BPI bid (please see “DBRS Comments on CaixaBank’s Capital Increase and Banco BPI Bid”).

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 CP.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by three notches, resulting in a downgrade of the covered bond ratings by three notches. In addition, everything else being equal, BPI’s OH ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below “A,” (2) the LSF Assessment associated with the Programme were downgraded, (3) the quality and consistency of the CP were no longer sufficient to support a two-notch uplift for high recovery prospects, (4) the relative amortisation profile of the OH and CP were moved adversely or (5) volatility in the financial markets were to cause the currently estimated market value spreads to increase.

The Programme was established in 2008 under the Portuguese covered bond law to issue up to EUR 7 billion of OH. The current outstanding amount of the OH is EUR 4.70 billion, while the aggregate balance of the assets in the CP is EUR 6.50 billion (as at September 2016), resulting in a total OC of 38.4%. The Issuer has committed to maintain an OC of 32.5%.

As at 30 September 2016, the CP assets comprised EUR 6.49 billion of outstanding mortgage credits (99.7% of the CP) and EUR 16.5 million of other assets (0.3% of the CP). The CP comprises 133,684 residential mortgages with a weighted-average current unindexed loan-to-value ratio of 55.1%, a weighted-average seasoning of 103 months and a weighted-average remaining time to maturity of 297 months. The pool is geographically diversified across the country and almost entirely originated for the purpose of acquiring first or second homes (99.0% of the CP). All CP assets are denominated in euros, as well as all OH. As such, investors are not currently exposed to any foreign exchange risk.

Currently, BPI’s OH does not benefit from any swap contract to hedge the mismatches between the interest yielded by the CP (95.9% floating rate linked to different indexes and resets) and the interest paid to holders of the covered bonds, linked to three months Euribor with quarterly resets. The weighted-average life of the assets is roughly eight years, whereas the current weighted-average life of the OH is roughly five years; this generates an asset-liability mismatch that is partly mitigated by the available OC.

For further information on BPI’s OH, please refer to the rating report available on www.dbrs.com.

DBRS has assessed the LSF related to BPI’s OH as Average according to its rating methodology. For more information, please refer to the DBRS 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 to the rating is “Rating European Covered Bonds.” This can be found 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, operational risk review and cash flow analysis 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. These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

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 data and information used for this rating include investor reports and stratification information on the CP provided by the Issuer, which allowed DBRS to further assess the portfolio. DBRS considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis. At the time of the initial rating, 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 or independently verify the information it receives in connection with the rating process.

The last rating action on this Programme took place on 14 October 2016 when DBRS maintained the ratings on the outstanding BPI OH Under Review with Developing Implications.

This rating is Under Review with developing implications. The review of the covered bonds will be resolved only once the conditions that led to the assignment of the review status are resolved. Generally, the conditions that lead to the assignment of a review are resolved within a 90-day period.

The lead analyst responsibilities have been transferred to Alessandra Maggiora.

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: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 1 April 2015

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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:
-- 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 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.