DBRS Confirms “A” Ratings on Banco Comercial Português S.A. Covered Bonds

DBRS Ratings GmbH (DBRS) confirmed its “A” ratings on the Obrigações Hipotecárias (OH; the Portuguese legislative Covered Bonds) issued under the Banco Comercial Português (BCP or the Issuer) EUR 12.5 billion Covered Bonds programme (the Programme).

This rating action follows the upgrade of BCP to BBB (low) from BB (high) and its Long-Term Critical Obligations Rating (LT COR) to BBB (high) from BBB on 3 June 2019.

The Covered Bonds Attachment Point (CBAP), which is the LT COR of BCP, was upgraded to BBB (high) from BBB. The lowest Cover Pool Credit Assessment in line with the LSF-Implied Likelihood (LSF-L) remains unchanged at BB. The BBB (high) LSF-L remains unchanged and, therefore, it has no impact on the “A” ratings of BCP´s OH.

The ratings are based on the following analytical considerations:
-- A CBAP of BBB (high), which is the LT COR of BCP. BCP is the Issuer and the Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of “Average” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BB, 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 committed minimum overcollateralisation (OC) of 14%. DBRS gives full credit to such commitment in accordance with its principal methodology. Such a level is not subject to haircut as DBRS considers it to be persistent based on historically observed levels.

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 cover pool (CP).

Everything else being equal, a downgrade of the CBAP by two notches would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the covered bonds rating. In addition, all else unchanged, the OH ratings would be downgraded if any of the following occurred: (1) the sovereign rating of the Republic of Portugal was downgraded below BBB (low); (2) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (3) the relative amortisation profile of OH and CP moved adversely; or (4) volatility in the financial markets caused the currently estimated market value spreads to increase.
There are five series of OH outstanding under the Programme totalling a nominal amount of EUR 8.2 billion, while the aggregate balance of mortgages in the CP was EUR 11.52 billion as of March 2019, yielding a current OC ratio of 40.5%. The Issuer has publicly committed to maintain an OC level of 14.0%.

As of 31 March 2019, the mortgage CP comprised 226,764 residential mortgages granted to individuals, with an average loan amount of EUR 50,807. The weighted-average (WA) current loan-to-value of the mortgages was 54% with a seasoning of 116 months. The CP is located mainly in Lisbon (41.9% by outstanding balance), Northern Portugal (30.0%) and Central Portugal (15.0%).

Of the loans in the portfolio, 87.1% pay a floating interest rate, indexed to Euribor, and 12.9% of the loans pay a fixed rate, while 12.2% of the covered bonds are fixed rate.

The DBRS-calculated weighted-average life of the mortgage assets is roughly 14 years, which is longer than the 2.3 years of WA life on the covered bonds, 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 available OC.

All CP assets and covered bonds 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 ratings 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 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: https://www.dbrs.com/research/333487/rating-sovereign-governments.

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 ratings, 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 March 2019, when DBRS confirmed its “A” rating on Series 7 after the amendment of the series.

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 GmbH, Sucursal en España are subject to EU and US regulations only.

Lead Analyst: Covadonga Aybar, Vice President
Rating Committee Chair: Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 28 February 2012

DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
28006 Madrid
Spain

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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.