DBRS Confirms Banco de Investimento Imobiliàrio Covered Bonds Rating

DBRS Ratings Limited (DBRS) has today confirmed its rating of A (high) on the Obrigações Hipotecárias (OH; the Portuguese legislative covered bonds) issued under the Banco de Investimento Imobiliário (BII or the Issuer) Covered Bond Programme, following the amendments to Series 1 (the only Series of the Programme), as executed on 18 January 2017.

Effective from 20 January 2017, according to its restated terms, the Maturity Date has been postponed to 27 January 2020 from 27 January 2017, and the Extended Maturity Date has been postponed to 27 January 2040 from 27 January 2037.

Banco Comercial Português (BCP) is the Reference Entity for the BII OH Programme, as BCP is liable for BII’s obligations. BCP’s liability is irrevocable, unconditional, shall survive the end of the group relationship and shall last until satisfaction of all entitlements of the Issuer's creditors.

There is one series of covered bonds outstanding under the Programme, for a total amount of EUR 895 million, entirely retained.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB, being the Long-Term Critical Obligations Rating of BCP.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), 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 level of overcollateralisation (OC) to which DBRS gives credit of 12.5%. Such level is not subject to haircut as DBRS has observed it has been persistent for the past 24 months.

The transaction was modelled with DBRS’s 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 cover pool (CP).

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.
In addition, the ratings of the OH would be downgraded if the following occurred: (1) the CPCA were downgraded below BBB (low), (2) the sovereign rating of the Republic of Portugal were downgraded below BBB (low), (3) the LSF assessment associated with the programme were downgraded, (4) the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects, (5) the relative amortisation profile of the OH and CP moved adversely or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

The total outstanding amount of OH is EUR 895 million, while the aggregate balance of the mortgages in the CP is EUR 1,025 million (as of 30 September 2016), resulting in total OC of 14.5%, which is above the committed level of 12.5%.

As of 30 September 2016, the mortgage CP comprised 27,180 residential mortgages granted to individuals, with an average loan amount of EUR 37,709. The weighted-average current loan-to-value of the mortgages was 55.1% with a seasoning of 12.9 years. The CP is located mainly in Northern Portugal (42.2% by outstanding balance), Lisbon (36.7%), and Central Portugal (15.5%).

Of the loans in the portfolio, 98% pay a floating interest rate, and the covered bonds are floating rate as well.

As of 30 September 2016, the weighted-average life of the CP was 11.8 years, which is longer than the three-year weighted-average life on the OH, taking into account the expected maturities. This risk is partly mitigated by the OC available and by a long 20-year extendable maturity feature by which, should the Issuer default on its payment on the Covered Bonds at the expected maturity date, the covered bond maturity is automatically extended up to 20 years, with a pass-through structure until such date.

DBRS has assessed the LSF related to BII OH as Average according to its rating methodology. For more information, please refer to DBRS’s “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review” commentaries, both available at www.dbrs.com.

All CP assets are denominated in euros, as are the OH. As such, investors are not currently exposed to any foreign exchange risk.

For further information on BII OH, please refer to the rating report that is available on www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Covered Bonds.”

In DBRS’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on a cash flow analysis.

A review of the transaction legal documents was limited to the documentation pertaining to the amendments to the Series 1 final terms. 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 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 data and information used for this rating include historical default performance data, loan-by-loan level information and stratification tables on the cover pool provided by the Issuer.

DBRS did 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 data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating actions on this transaction took place on 22 June 2016, when DBRS upgraded the rating of BII OH to A (high) from A (low) and removed the Under Review status.

The lead analyst responsibilities for this transaction have been transferred to Antonio Laudani.

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: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 28 February 2012

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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.