DBRS Upgrades Ratings on the Notes Issued by SAGRES - STC, SA (Lusitano SME No. 3)

DBRS Ratings Limited (DBRS) upgraded the Notes issued by SAGRES - Sociedade de Titularização de Créditos, S.A. (Lusitano SME No. 3) (the Issuer) as follows:

-- Class A Notes upgraded to AAA (sf) from AA (sf)
-- Class B Notes upgraded to AA (high) (sf) from AA (low) (sf)
-- Class C Notes upgraded to AA (sf) from BBB (high) (sf)

The ratings on the Class A Notes and Class B Notes address the timely payment of interest and the ultimate payment of principal payable on or before the Final Legal Maturity Date in 2037. The rating on the Class C Notes addresses the ultimate payment of interest and principal payable on or before the Final Legal Maturity Date in 2037.

The upgrades follow an annual review of the transaction and are based on the following analytical considerations:

-- Portfolio performance in terms of delinquencies and defaults as of the September 2018 payment date;
-- The default rate, recovery rate and expected loss assumptions for the remaining collateral pool; and
-- The current available credit enhancement (CE) to the Class A, Class B and Class C Notes to cover the expected losses assumed in line with the AAA (sf), AA (high) (sf) and AA (sf) rating levels, respectively.

The Issuer is a limited liability company incorporated under the laws of Portugal. The transaction is a cash flow securitisation collateralised by a portfolio of bank loans originated and serviced by NOVO BANCO, S.A. (Novo Banco or the Originator) to Portuguese corporates, small and medium-sized enterprises (SMEs) and self-employed individuals. FinSolutia, S.A., acts as the Back-Up Servicer and upon a servicer event of default will assume the servicing of Lusitano SME No. 3 portfolio within 90 days. The arrangement is considered “warm” by DBRS.

PORTFOLIO PERFORMANCE
As of the 21 September 2018 payment date, the overall portfolio consisted of 2,594 loans with an aggregate principal balance of EUR 246.3 million. The portfolio is performing within DBRS’s expectations. The outstanding balance of loans in arrears for more than 90 days was at 0.29% in terms of the outstanding portfolio. The cumulative gross default ratio was 0.1% of the original portfolio balance.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the remaining pool and updated its portfolio default rate and recovery assumptions on the outstanding portfolio to 53.0% and 23.5%, respectively, at the AAA (sf) rating level, 49.0% and 26.9% respectively, at the AA (high) (sf) rating level, and 47.8% and 26.9% respectively, at the AA (sf) rating level.

CREDIT ENHANCEMENT
As of September 2018, the CE to the Class A, Class B and Class C Notes was 99.8%, 74.3% and 48.9%, up from 60.1%, 44.9% and 29.7%, respectively, in September 2017. The CE of the Class A, Class B and Class C Notes considers the subordinated notes and the cash reserve (CR). The CR is available to cover tax, expenses, fees, and Class A interest until redeemed in full and thereafter for other junior rated notes. The Reserve had an initial balance of EUR 9.5 million (equal to 1.5% of the Floating Rate Notes). CR is currently at its target level of EUR 4.2 million and its balance will go to zero once the Floating Rate Notes are fully redeemed.

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).

Elavon Financial Services DAC (Elavon) acts as the Transaction Account Bank for the transaction. The DBRS private rating of Elavon 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 ratings is: 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 surveillance section of 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” at: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of data and information used for these ratings include reports provided by U.S. Bank and loan-level 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 these ratings 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 16 November 2017, when DBRS upgraded its ratings on the Class A, Class B and Class C Notes to AA (sf), AA (low) (sf) and BBB (high) (sf) from AA (low) (sf), BBB (high) (sf) and B (high) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Francesco Amato.

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”):

-- Probability of Default (PD) Rates Used: Base case PD of 7.9%, a 10% increase of the base case and a 20% increase of the base case PD.

-- Recovery Rates Used: Base case recovery rates of 23.5% at the AAA (sf) stress level for the Class A Notes, base case recovery rates of 26.9% at the AA (high) (sf) stress level for the Class B Notes and base case recovery rates of 26.9% at the AA (sf) stress level for the Class C Notes, a 10% and 20% decrease in the base case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

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

Regarding the Class B Notes, a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class B Notes at AA (high) (sf). A scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Class B Notes at AA (high) (sf).

Regarding the Class C Notes, a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class C Notes at AA (sf). A scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Class C Notes at AA (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: Francesco Amato, Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 7 November 2016

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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

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

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.