DBRS Confirms Santander Totta S.A. Covered Bonds (Obrigações Hipotecárias - Mortgages) at AA (low)

DBRS Ratings Limited (DBRS) confirmed its AA (low) ratings on the Obrigações Hipotecárias (OH; the Portuguese legislative covered bonds) issued under the Banco Santander Totta S.A. (Totta or the Issuer) EUR 12.5 billion OH programme (the Programme). The confirmation follows the completion of a full review of the Programme.

There are ten series of OH outstanding under the Programme totalling a nominal amount of EUR 8.05 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A”, which is the Long-Term Issuer Rating of Totta. Totta is the Issuer of and Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of “Average” associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) of “A”.
-- A two-notch uplift for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 15%. DBRS gives full credit to such commitment in accordance with its principal methodology. Such level is not subject to a 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 one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds ratings by one-notch. In addition, all else unchanged, the OH ratings would be downgraded if the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.

As of 30 June 2019, the aggregated outstanding balance of the CP underlying the Issuer’s OH was EUR 9.42 billion. The total amount of liabilities outstanding is EUR 8.05 billion, yielding a current nominal OC ratio of 17.1%. The Issuer has publicly committed to maintain an OC level of 15.0%.

As at June 2019, the CP assets comprised 174,325 residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 55.3%, a WA seasoning of 100 months and a WA remaining time to maturity of 320 months. The CP is located mainly in Lisbon (37.7% by outstanding balance), Northern Portugal (30.7%) and Central Portugal (17.2%). All loans were originated for the purpose of acquiring first or second homes.

Approximately 97% of the loans in the CP are floating rate, indexed to different bases and reset at different times, while all OH series are fixed rate. The interest rate mismatch is mitigated by intra-group swap agreements; however, the swap documentation is not consistent with DBRS’s “Derivative Criteria for European Structured Finance Transactions”. As such, no credit was given to swaps in DBRS’s analysis, and the interest rate mismatch has been taken into account in DBRS’s analysis.

The DBRS-calculated WA life of the mortgage assets is roughly 15 years based on a 0% prepayment rate, which is longer than the 5.8 years of WA life on the OH, 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 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 “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 and Monitoring 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: https://www.dbrs.com/research/333487/rating-sovereign-governments.

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 5 July 2019, when DBRS assigned a AA (low) rating to Series 24 and discontinued its rating on Series 13.

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: 27 February 2012

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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

-- Rating and Monitoring Covered Bonds
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative 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.