DBRS Upgrades Ratings on Tagus - Sociedade de Titularização de Créditos, S.A. (Aqua Finance No. 4)

DBRS Ratings GmbH (DBRS) upgraded its ratings on the Class A Notes and Class B Notes issued by Tagus - Sociedade de Titularização de Créditos, S.A. (Aqua Finance No. 4) as follows:

-- Class A Notes to A (sf) from A (low) (sf)
-- Class B Notes to BBB (high) (sf) from BBB (low) (sf)

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in June 2035. The rating on the Class B Notes addresses the ultimate payment of interest and principal on or before the legal final maturity date.

The upgrades follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults and losses;
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement (CE) to the notes to cover the expected losses at their respective rating levels.

Aqua Finance No. 4 is a Portuguese securitisation of loans, leases and rental agreements of automobiles, commercial trucks and miscellaneous equipment granted to private individuals and companies, originated and serviced by Montepio Crédito - Instituição Financeira de Crédito (Montepio Crédito). The transaction closed in July 2017, and incorporated an 18-month revolving period, which ended in January 2019.

Additionally, promissory agreements relating to certain auto and commercial truck leases and renting agreements are included in the pool. Under these agreements, the vehicle supplier undertakes to repurchase the related asset at the contract term, at a price agreed between Montepio Crédito and the supplier at origination. If the relevant supplier defaults, the originator may have to sell or re-lease the assets at a price lower than that agreed in the promissory agreement, exposing the transaction to residual value (RV) risk.

PORTFOLIO PERFORMANCE
As of June 2019 payment date, loans that were one-to-two and two-to-three months delinquent represented 1.2% and 0.9% of the principal outstanding balance of the portfolio, respectively, while loans that were three-to-six months delinquent represented 0.5%. Gross cumulative defaults amounted to 0.5% of the aggregate original portfolio balance, with cumulative recoveries of 13.3% to date.

PORTFOLIO ASSUMPTIONS
Following the end of the revolving period, DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 11.0% and 87.0%, respectively.

CREDIT ENHANCEMENT
CE is provided by the subordination of the junior obligations and the cash reserve account. As of the June 2019 payment date, CE to the Class A Notes was 40.2%, up from 31.2% at the DBRS initial rating, while CE to the Class B Notes was 30.2%, up from 23.4% at the DBRS initial rating. Both the updated portfolio assumptions and increase in CE following the end of the revolving period prompted the rating upgrades.

The transaction benefits from a non-amortising cash reserve, funded at closing through the proceeds of the Class C Notes issuance, which is available to cover senior expenses and interest shortfalls on the Class A Notes; following the full amortisation of the Class A Notes, the reserve will be available to cover interest shortfalls on the Class B Notes. The cash reserve also provides credit support to the Class A Notes as its replenishment is subordinated to the cure of the Class A Principal Deficiency Ledger balance in the interest priority of payments. As of the June 2019 payment date, the cash reserve was at its target level of EUR 7.0 million.

Deutsche Bank AG, London Branch (DB London) acts as the account bank for the transaction. Based on the DBRS private rating of DB London, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Class A Notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

The transaction structure was analysed in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “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 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/333487/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include investor reports provided by DB London as well as servicer reports and loan-level data provided by Montepio Crédito.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial ratings, 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 12 July 2018, when DBRS confirmed its ratings of the Class A Notes and Class B Notes at A (low) (sf) and BBB (low) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Daniel Rakhamimov.

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

To assess the impact of changing the transaction parameters on the ratings, DBRS considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):

-- DBRS expected a lifetime base case PD and LGD for the pool 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 11.0% and 87.0%, respectively.
-- The RV loss of 37.0% and 34.8% at the A (sf) and BBB (high) (sf) rating levels, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD, LGD and RV loss increase by a certain percentage over the base case assumption. For example, if the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to decrease to BBB (low) (sf), ceteris paribus. If the RV loss increases by 50%, the rating of the Class A Notes would be expected to decrease to BBB (high) (sf), ceteris paribus. Furthermore, if the PD, LGD and RV loss all increase by 50%, the rating of the Class A Notes would be expected to decrease to BB (high) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and LGD, expected rating of BBB (low) (sf)
-- 25% increase in RV Loss, expected rating of A (low) (sf)
-- 50% increase in RV Loss, expected rating of BBB (high) (sf)
-- 25% increase in RV Loss and 25% increase in PD and LGD, expected rating of BBB (sf)
-- 25% increase in RV Loss and 50% increase in PD and LGD, expected rating of BBB (low) (sf)
-- 50% increase in RV Loss and 25% increase in PD and LGD, expected rating of BBB (low) (sf)
-- 50% increase in RV Loss and 50% increase in PD and LGD, expected rating of BB (high) (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and LGD, expected rating of BB (sf)
-- 25% increase in RV Loss, expected rating of BBB (sf)
-- 50% increase in RV Loss, expected rating of BBB (low) (sf)
-- 25% increase in RV Loss and 25% increase in PD and LGD, expected rating of BB (sf)
-- 25% increase in RV Loss and 50% increase in PD and LGD, expected rating of BB (low) (sf)
-- 50% increase in RV Loss and 25% increase in PD and LGD, expected rating of BB (sf)
-- 50% increase in RV Loss and 50% increase in PD and LGD, expected rating of B (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 GmbH are subject to EU and US regulations only.

Lead Analyst: Daniel Rakhamimov, Senior Financial Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 21 June 2017

DBRS Ratings GmbH
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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.

-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Interest Rate Stresses for European Structured Finance Transactions

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.