DBRS Confirms Novo Banco S.A. Covered Bonds (Obrigações Hipotecárias - Mortgages - CPT) at “A”

DBRS Ratings Limited (DBRS) confirmed its “A” ratings on the outstanding Obrigações Hipotecárias (OH; the Portuguese legislative covered bonds) issued under the Novo Banco S.A. (Novo Banco or the Issuer) Conditional Pass-Through Covered Bond Programme (the Programme). The confirmation follows the completion of a full review of the Programme.

There are five series of OH outstanding under the Programme, with a nominal amount of EUR 4.20 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BB, which is the Long-Term Critical Obligations Rating of Novo Banco. Novo Banco is the Reference Entity (RE) for the Programme. DBRS does not consider OH to be a systemically important financing tool in Portugal; however, DBRS considers the assets in the Programme strategic to the core activity of the RE.
-- A Legal and Structuring Framework (LSF) Assessment of Adequate associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A (low), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of BBB (high).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 9.0% to which DBRS gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.9.

The transaction cash flow structure was analysed using the DBRS European Covered Bond Cash Flow Engine. The main assumptions focused on the timing of defaults and recoveries of the assets and interest rate stresses. In accordance with DBRS’s “Rating European Covered Bonds” methodology, no forced asset liquidation has been modelled for this transaction given the conditional pass-through structure, and DBRS has assumed several prepayment scenarios, ranging between a 1% and 10% prepayment rate.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds (CB) rating by one notch.

In addition, all else unchanged, the OH ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below A (low); (2) the LSF Assessment associated with the Programme was downgraded; or (3) the quality of the cover pool (CP) and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.

As at 30 September 2018, the aggregated outstanding balance of the CP underlying the Issuer’s OH was EUR 4.6 billion. The total amount of liabilities outstanding is EUR 4.20 billion, yielding a current nominal OC ratio of 10.0%. The OC level to which DBRS gives credit is 9.0%, after applying a scaling factor of 0.9 to the minimum level of OC observed during the last 12 months.

The vast majority (99.96%) of the loans in the CP are prime residential mortgage loans, the rest being the cash reserve. The mortgage CP has a weighted-average (WA) current unindexed loan-to-value ratio of 57.2%, a WA seasoning of 98.6 months and a WA remaining time to maturity of 299 months. Geographically, the pool is mainly distributed in Lisbon, Portugal (41.8% by outstanding balance), as well as the north (26.7%) and centre (19.3%) of Portugal.

Novo Banco’s OH do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (90% floating rate linked to different indexes and reset dates) and the interest paid to the CB holders, linked to three-month Euribor plus 25 basis points with quarterly resets. If the maturity of the bonds is extended, the outstanding series become pass-through paying one-month Euribor plus 25 basis points on a quarterly basis. This risk is mitigated by the OC available and has been accounted for in DBRS’s cash flow engine.

As of today, the DBRS-calculated WA life of the CP was roughly 14.1 years based on a 0% prepayment rate, which is longer than the 2.6-year WA life of the OH, not accounting for any extension of maturity. This is mitigated by the conditional pass-through nature of the OH. All CP assets and OH are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.

DBRS has assessed the LSF related to the Programme as Adequate according to its rating methodology. For more information, please refer to DBRS’s commentaries, “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review,” both available at www.dbrs.com.

For further information on the Programme, please refer to the rating report at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Covered Bonds.”

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 “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 these ratings include investor reports, loan-by-loan data on the CP and historical default performance data provided by the Issuer.

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 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 26 September 2018, when DBRS confirmed its “A” rating following an amendment to Series 1.

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

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: Roger Bickert, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 December 2015

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.

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Interest Rate Stresses for European Structured Finance Transactions
-- Rating Sovereign Governments

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.