DBRS Confirms Rating of Lusitano Mortgages No.7 Limited and Removes the UR-Pos. Status

DBRS Ratings Limited (DBRS) confirmed its rating of AA (high) (sf) on the Class A Notes issued by Lusitano Mortgages No. 7 Limited (the Issuer).

Additionally, DBRS removed the Under Review with Positive Implications (UR-Pos.) status of the Class A Notes. The rating was placed UR-Pos. on 11 May 2018 following the upgrade of the Long-Term Foreign and Local Currency – Issuer Ratings on the Republic of Portugal (Portugal) to BBB from BBB (low). For additional information on the upgrade, please see DBRS’s press release entitled “DBRS Upgrades Republic of Portugal to BBB, Stable Trend”, published on 20 April 2018.

The confirmation also follows a review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of level of delinquencies, defaults and losses as of the July 2018 payment date;
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables, reflecting the upgrade of the Portuguese sovereign rating; and
-- Current available credit enhancement (CE) to the Class A Notes to cover expected losses at the AA (high) (sf) rating level.

The rating addresses the timely payment of interest and ultimate payment of principal on or before the relevant legal final maturity date.

The Issuer is a securitisation of first-lien Portuguese residential mortgage loans originated and serviced by Novo Banco, S.A.

PORTFOLIO PERFORMANCE
As of the July 2018 payment date, loans that were two- to three-months in arrears represented 0.3% of the outstanding principal balance of the portfolio. The 90+ delinquency ratio was 0.9%; the gross cumulative default ratio was 8.2%; and the cumulative loss ratio was 0.4%.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the outstanding portfolio and updated its base case PD and LGD assumptions to 7.8% and 10.1% from 8.9% and 10.8%, respectively. The updated assumptions reflect the upgrade of Portugal on 20 April 2018.

CREDIT ENHANCEMENT
As of the July 2018 payment date, CE to the Class A Notes was 36.4%, up from 25.0% at the initial rating. CE to the Class A Notes consists of subordination of the Class B and Class C Notes. To assess a hypothetical upgrade of the Class A Notes to AAA (sf) following the upgrade of Portugal, DBRS considered additional stresses to account for potential currency depreciation and capital controls in the unlikely scenario of a Portuguese eurozone exit. DBRS concluded that the current level of CE and liquidity mitigants present in the deal would not be sufficient at the AAA (sf) rating level scenario to mitigate the country risk, given the current Long-Term Issuer Rating of Portugal at BBB.

The transaction benefits from a reserve fund currently at its target level of EUR 57 million that is available to cover senior fees and any interest shortfall on the Class A and Class B Notes.

Citibank N.A, London Branch acts as Accounts Bank for the transaction. The DBRS private rating of Citibank N.A, London Branch is consistent 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.

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 these transactions 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 N.A., London Branch and loan-by-loan data provided by 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 May 2018, when the rating was placed UR-Pos. following the upgrade of the Portugal Long-Term Foreign and Local Currency – Issuer Ratings to BBB from BBB (low) on 20 April 2018. Prior to that, on 29 March 2018 DBRS confirmed the rating of the Class A Notes at AA (high) (sf).

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 rating, 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 7.8% and 10.1%, respectively.
-- The Risk Sensitivity below illustrates the rating 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 (high) (sf), all else being equal. If the PD increases by 50%, the rating of the Class A Notes would be expected to remain at AA (high) (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 remain at AA (high) (sf), all else being equal.

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

Lead Analyst: Clare Wootton, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 28 February 2011

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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
-- Interest Rate Stresses for European Structured Finance Transactions
-- 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.

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