DBRS Assigns A (high) UR-Dev. Rating to Banco BPI S.A. Covered Bonds’ New Issuance

DBRS Ratings Limited (DBRS) has today assigned a rating of A (high) to a new covered bond, Series 17 – PTBBBGOE0023, issued under the Banco BPI S.A. Covered Bonds Programme (Obrigações Hipotecárias - Mortgages) (BPI OH or the Programme) and has placed the rating Under Review with Developing Implications. Series 17 is a EUR 700 million floating-rate note, indexed to three months Euribor plus 1%, that matures in February 2024.

DBRS has also discontinued the rating on Series 8, which matured on 12 February 2017, and has maintained the Under Review with Developing Implications status on the ratings of all outstanding series under the Programme.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) that reflects the likelihood that BPI’s 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 28.2% that DBRS gives credit to, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.9, and an OC commitment of 25.0%.

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 in order 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, the BPI obrigações hipotecárias (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. All series benefit from a maturity extension of one year.

As of today, there are nine series of OH outstanding, including Series 17, for a total amount of EUR 5.2 billion. The aggregate balance of the assets in the CP is EUR 6.83 billion (as at February 2017), resulting in a total OC of 31.3%. The Issuer has committed to maintain an OC of 25.0%.

As at 30 December 2016, the CP assets comprised EUR 6.50 billion of outstanding mortgage credits (99.8% of the CP) and EUR 16.17 million of other assets (0.2% of the CP). The CP comprises 134,053 residential mortgages with a weighted-average current unindexed loan-to-value ratio of 54.9%, 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 2 August 2016 rating report available on www.dbrs.com.

DBRS has assessed the LSF related to BPI’s OH as Average according to its covered bond 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, DBRS focused on the cash flow analysis.

A review of the transaction legal documents was limited to the documentation pertaining to the issuance of Series 17. All other transaction 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 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 16 January 2017 when DBRS maintained Under Review with Developing Implications on the ratings on the outstanding BPI OH.

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.

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: Vito Natale, Senior Vice President
Initial Rating Date: 1 April 2015

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

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

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.