DBRS Upgrades Rating of Class A Notes Issued by Sagres Sociedade de Titularização de Créditos, S.A. (Pelican SME No. 2)

DBRS Ratings Limited (DBRS) upgraded its rating of the Class A Notes issued by Sagres Sociedade de Titularização de Créditos, S.A. (Pelican SME No. 2) (the Issuer) to AAA (sf) from AA (sf).

The rating action follows an annual review of the transaction and is based on the following analytical considerations:
-- The overall portfolio performance as of the July 2018 payment date, particularly with regard to delinquencies and defaults;
-- The updated default rate, recovery rate and expected loss assumptions for the remaining collateral pool; and
-- The current level of credit enhancement (CE) available to the Class A Notes to cover the expected losses assumed in line with the AAA (sf) rating level.

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the Final Legal Maturity Date in February 2043.

The Issuer is a Portuguese securitisation of term loans and working capital facilities granted by Caixa Económica Montepio Geral (Montepio) to Portuguese small- and medium-sized enterprises (SMEs).

The transaction closed in March 2015 and included a 24-month revolving period followed by a 12-month offering period, whereby Montepio would have the option to sell to the Issuer additional drawings under revolving lines of credit already in the portfolio. The revolving period ended in March 2017 and, in June 2017, Montepio exercised the option to terminate the offering period and the Class A Notes started to amortise.

PORTFOLIO PERFORMANCE
As of the July 2018 payment date, the overall portfolio consisted of 11,589 contracts with an aggregate principal balance of EUR 578.3 million, of which EUR 9.9 million related to working capital facilities.

The loans in arrears between one and two months and the loans in arrears between two and three months represented 1.1% and 1.5% of the principal outstanding balance of the portfolio, respectively, while delinquencies greater than three months were 1.2%. The cumulative gross default ratio was 3.2% of the original portfolio and cumulative transferred receivables, with recoveries of 46.7%.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the remaining pool and updated its portfolio default and recovery assumptions on the outstanding portfolio to 55.8% and 17.0%, respectively, at the AAA (sf) rating level.

CREDIT ENHANCEMENT
CE is provided by the subordination of the junior obligations and the Cash Reserve account. The Cash Reserve is available to cover senior expenses and interest shortfalls on the Class A Notes and, since closing, this account has always been at the EUR 16.4 million target level.

As at the July 2018 payment date, the Class A Notes’ CE was 99.4%, up from 59.3% in July 2017. The increase in the CE is driven by the fast deleveraging of the transaction, with Class A Notes being amortised by EUR 366.4 million over the last year to EUR 19.9 million.

The current CE for the Class A Notes is deemed to be sufficient to mitigate the country risk given the current Long-Term Issuer Rating of the Republic of Portugal at BBB. DBRS considered additional stresses to account for a potential currency depreciation and capital controls in the unlikely scenario of a Portuguese eurozone exit and concluded that the current level of CE as well as the liquidity mitigants present in the deal are consistent with an upgrade of the Class A Notes to AAA (sf).

Citibank N.A., London Branch (Citibank London) is the Accounts Bank for the transaction. On the basis of the DBRS private ratings of Citibank London and the mitigants outlined in the transaction documents, DBRS considers the risk arising from the exposure to the Accounts Bank to be consistent with the ratings assigned to the rated notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “Rating CLOs Backed by Loans to European SMEs”.

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 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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include investor reports provided by Citibank London and loan-by-loan data 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 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 31 July 2017, when DBRS upgraded the rating on Class A Notes to AA (sf) from A (low) (sf).

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

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

-- Probability of Default (PD) rates used: Base case PD of 6.2%, a 10% and 20% increase on the base case PD.
-- Recovery Rates used: Base case recovery rate of 17.0% at the AAA (sf) stress level and a 10% and 20% decrease in the base case recovery rate. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

DBRS concludes that either a hypothetical increase of the base case PD by 10%, a hypothetical decrease of the recovery rate by 10%, or a scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would lead to a confirmation of the Class A Notes rating at AAA (sf). Either a hypothetical increase of the base case PD by 20%, a hypothetical decrease of the recovery rate by 20% or a scenario combining both an increase in the PD by 20% and a decrease in the recovery rate by 20% would lead to a confirmation of the Class A Notes rating at AAA (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 and US regulations only.

Lead Analyst: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 10 March 2015

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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 CLOs Backed by Loans to European SMEs
-- Rating CLOs and CDOs of Large Corporate Credit
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Master European Structured Finance Surveillance Methodology

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.