DBRS Confirms Rating of the Class A Notes Issued by Sagres STC (Pelican Mortgages No. 6) and Removes the UR-Pos. Status

DBRS Ratings Limited (DBRS) confirmed its AA (high) (sf) rating of the Class A notes issued by Sagres STC (Pelican Mortgages No. 6) (the Issuer).

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

The rating confirmation follows a review of the transaction and is based on the following analytical considerations:
-- The overall portfolio performance, in terms of level of delinquencies and defaults, as of the June 2018 payment date;
-- The updated default rates, loss given default (LGD) and expected loss assumptions for the remaining collateral pool, reflecting the upgrade of the Portuguese sovereign rating;
-- The current level of credit enhancement available to the Class A notes to cover expected losses assumed in line with the AA (high) (sf) rating level.

The rating of 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 2063.

The Issuer is a Portuguese securitisation of residential mortgage loans granted and serviced by Caixa Económica Montepio Geral (Montepio). The transaction closed in March 2012 and the Notes have been issued under the Sociedade de Titularização de Créditos (STC) regime.

As at 25 June 2018, the balance of the Class A notes was EUR 471.9 million and the balance of the Class B notes was EUR 250.0 million. The structure also includes the EUR 65.0 million Class D notes, issued to fund the cash reserve account, and the EUR 40.2 million Class S notes, issued to fund the acquisition of the Exposure Amount Mortgage Backed Credits Portfolio, a segregated pool which is available to mitigate the transaction’s set-off risk.

PORTFOLIO PERFORMANCE
As at the June 2018 payment date, one-to-two month, two-to-three month and three-to-twelve month delinquencies represented 0.6%, 0.2% and 1.3% of the outstanding principal balance of the portfolio, respectively, while defaulted loans (defined as more than 12 months in arrears and not classified as written off) represented 0.8%. Gross cumulative deemed principal losses represented 4.7% of the original portfolio balance, with cumulative recoveries of 27.9%.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the outstanding portfolio and updated its base case probability of default (PD) and LGD assumptions to 10.2% and 26.1% from 11.2% and 26.6%, respectively. The updated assumptions reflect DBRS’s upgrade of the Republic of Portugal’s Long-Term Foreign Currency rating to BBB with a Stable trend on 20 April 2018.

CREDIT ENHANCEMENT
The Class A notes’ credit enhancement is provided by the subordination of the junior obligations and the Cash Reserve General Ledger. As of June 2018, credit enhancement to the Class A notes was 39.5%.

The cash reserve account is divided into two ledgers: the General Ledger, available to cover senior expenses, missed interest payments on the Class A notes and to cure the Class A Principal Deficiency Ledger; and the Shortfall Liquidity Ledger, which is available to cover senior expenses and missed interest payments on the Class A notes. The General Ledger target level is set at 7.5% of the Class A Notes balance, subject to a EUR 30.0 million floor, while the Shortfall Liquidity Ledger shall be funded in an amount equal to the interest amount due to the Class A notes on the subsequent payment date and the amounts paid under the senior items of the interest priority of payments.

Following the Republic of Portugal’s upgrade, to assess a hypothetical upgrade to AAA (sf) on the Class A notes, 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 credit enhancement as well as the 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.

Citibank N.A, London Branch acts as Account 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 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 May 2018, when DBRS placed the Class A notes’ rating UR-Pos., following the Portuguese sovereign rating upgrade. Prior to that, DBRS confirmed the rating of the Class A Notes at AA (high) (sf) on 13 April 2018.

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 10.2% and 26.1%, respectively. At the AA (high) (sf) rating level, the corresponding PD is 33.4% and the LGD is 44.1%.

-- 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: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 5 March 2012

DBRS Ratings Limited
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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
-- 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.