DBRS Confirms Rating on GAMMA - Sociedade de Titularização de Créditos, S.A. (Azor 2)

DBRS Ratings Limited (DBRS) has today confirmed its AA (sf) rating on the EUR 125,478,468.27 Class A Mortgage-Backed Floating Rate Notes (the Class A Notes) issued by GAMMA - Sociedade de Titularização de Créditos, S.A. (Azor 2) (the Issuer) following an annual review of the transaction.

The confirmation is based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of January 2017;
-- Updated portfolio default rate, loss given default (LGD) and expected loss assumptions for the remaining collateral pool;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms and conditions of the Class A Notes;
-- The current available credit enhancement to the Class A Notes to cover expected losses assumed in line with the AA (sf) rating level.

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal payable on or before the Final Legal Maturity Date in December 2065.

The Issuer is a Portuguese securitisation collateralised by a portfolio of residential mortgage loans originally granted by Banco Banif e Comercial dos Açores, S.A. The transaction follows the Sociedade de Titularização de Créditos (STC) arrangement and closed in July 2008. Banco Banif e Comercial dos Açores, S.A. was fully incorporated into Banco Internacional do Funchal SA (Banif) in January 2009, and in December 2015, Banco Santander Totta S.A. acquired part of Banif’s assets and obligations, including the contractual position of Banif in securitisation transactions.

As of 23 January 2017, the balance of the Class A Notes was EUR 125.5 million, the balance of the Class B Notes was EUR 43.1 million and the balance of the Class C Notes was 6.8 million. The EUR 166.9 million securitised portfolio (excluding written-off receivables) consists of first-ranking loans over residential properties mainly located on the Azores islands (92.1%).

PORTFOLIO PERFORMANCE
The +3 months delinquency ratio was 0.7%, while defaulted loans, defined as +12 months in arrears, were 1.1% of the outstanding principal balance of the portfolio. Gross cumulative write-offs, as a percentage of the original portfolio balance, stood at 3.1%, with cumulative recoveries of 43.5%.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the remaining pool and updated its base case probability of default (PD) and LGD assumptions on the outstanding portfolio to 13.1% and 23.2%, respectively. The base case LGD has deteriorated since the last annual review in March 2016, driven by an increase in the weighted average LTV to 60.9% from 53.2%. The increase in the weighted average LTV results from the change on the reported property valuation amounts of the pool, following the migration of Banif’s IT into Banco Santander Totta S.A.

CREDIT ENHANCEMENT
As of January 2017, credit enhancement to the Class A Notes was 28.9%, up from 26.7% in January 2016. Credit enhancement to the Class A Notes is provided by the subordination of the Class B Notes and the Cash Reserve Account.

The transaction benefits from an amortising Cash Reserve Account funded at closing through the proceeds of the Class C Notes and available to cover senior expenses and missed interest and principal payments on the Class A Notes. Up to the January 2017 payment date, the Cash Reserve Account has always been at its target level, currently at EUR 6.8 million.

HSBC Bank plc acts as Account Bank for the transaction. The DBRS private rating of HSBC Bank plc complies with the Minimum Institution Rating, given the rating assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

The Royal Bank of Scotland plc (RBS) is the Swap Counterparty. The DBRS Long-Term Critical Obligations Rating of RBS at “A” complies with the First Rating Threshold defined in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Master European Structured Finance Surveillance Methodology”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal 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 data and information used for this rating include investor reports provided by HSBC Bank plc and data provided by Banco Santander Totta S.A. and from the European DataWarehouse GmbH.

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 action on this transaction took place on 11 March 2016, when DBRS upgraded the rating on the Class A Notes to AA (sf) from A (high) (sf).

The lead responsibilities for this transaction have been transferred to Joana Seara da Costa.

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

To assess the impact of changing the transaction parameters on the ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- DBRS expected a base case PD and LGD for the portfolio based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.

-- The Base Case PD and LGD of the current pool of receivables are 13.1% and 23.2%. At the AA (sf) rating level, the corresponding PD is 36.0% and the LGD 38.9%.

-- The Risk Sensitivity below illustrates the ratings expected for the Class A Notes if the PD and LGD increase by a certain percentage over the base case assumptions. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at AA (sf), all else being equal. If the PD increases by 50%, the rating of Class A Notes would be expected to remain at AA (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to decrease to A (high) (sf), all else being equal.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

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: Joana Seara da Costa, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 8 July 2011

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY
United Kingdom
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.

-- Master European Structured Finance Surveillance Methodology
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- Operational Risk Assessment for European Structured Finance Servicers

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.