DBRS Assigns AA (low) Rating to Banco BPI S.A. Covered Bonds (Obrigações Hipotecárias - Mortgages) Series 21

DBRS Ratings Limited (DBRS) assigned a rating of AA (low) to the Series 21 Obrigações Hipotecárias (OH, the Portuguese legislative covered bonds) issued under the Banco BPI S.A. (BPI or the Issuer) Covered Bond Programme (the Programme). Series 21 has a nominal amount of EUR 300 million and a floating-rate coupon linked to six-month Euribor + 0.30%. The expected maturity date is 13 December 2022 and the final (extended) maturity date falls on 13 December 2023.

At the same time, DBRS discontinued the rating of Series 15, which was repaid on 13 December 2018, and confirmed the AA (low) ratings on the outstanding DBRS-rated covered bonds (CB).

Following the issuance of Series 21, there are ten series of OH for a nominal amount of EUR 6.50 billion outstanding under the Programme.

The ratings are based on the following analytical considerations:
-- A CBAP reflective of the likelihood that the source of payments will switch from the Reference Entity (RE) to the cover pool (CP). BPI is the Issuer of and RE for the Programme. BPI was not assigned a Long Term Critical Obligations Rating (COR) nor does DBRS consider Portugal as a jurisdiction in which CB are a particularly important financing tool.
-- A Legal and Structuring Framework (LSF) Assessment of “Average” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of “A”.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 14.1% to which DBRS gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.85.

The transaction was analysed with the DBRS European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and market value spreads to calculate liquidation values on the CP.

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

In addition, all else unchanged, the OH ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded to below BBB (low); (2) the sovereign rating of the Republic of Portugal was downgraded to below BBB (low); (3) the LSF Assessment associated with the Programme was downgraded; (4) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (5) the relative amortisation profile of the OH and CP moved adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

As of 30 September 2018, the aggregated outstanding balance of the CP underlying the Issuer’s OH was EUR 7.58 billion. The total amount of liabilities outstanding was EUR 6.50 billion, yielding a current nominal OC ratio of 16.6%. The OC level to which DBRS gives credit is 14.1%, after applying a scaling factor of 0.85 to the minimum level of OC observed during the last 12 months.

As at 30 September 2018, the CP assets comprised EUR 7.6 billion of outstanding mortgage credits (99.8% of the CP) and EUR 12.2 million of other assets (0.2% of the CP). The mortgage CP has a weighted-average (WA) current unindexed loan-to-value ratio of 56.4%, a WA seasoning of 109 months and a WA remaining time to maturity of 302 months. Geographically, the pool is mainly distributed in Lisbon (41.4% by outstanding balance), as well as the north (24.3%) and centre (18.6%) of Portugal.

BPI’s OH do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (96.1% floating rate linked to different indexes and reset dates) and the interest paid to the CB holders, linked to different Euribor rates with quarterly or semi-annually resets. This risk is partly mitigated by the OC available and has been accounted for in DBRS’s cash flow tool.

The DBRS-calculated WA life of the mortgage assets is about 13.8 years based on a 0% prepayment rate, which is longer than the 4.5 years WA life of the CB, not accounting for any maturity extension. This risk is mitigated by the Extended Maturity Date, which falls one year after the Maturity Date, and by the OC in place.

All CP assets and CB 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 “Average” 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”.

In DBRS’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the cash flow analysis. A review of the transaction legal documents was limited to the documentation pertaining to the issuance of Series 21. All the other 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 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 assigned an AA (low) rating to BPI OH Series 20.

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: 1 April 2015

DBRS Ratings Limited
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United Kingdom
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
-- Interest Rate Stresses 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
-- 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.

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