DBRS Morningstar Confirms Ratings on Two Pelican Mortgages Transactions

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) ratings on the respective Class A Notes (collectively, the Notes) issued by Sagres STC (Pelican Mortgages No. 5) (Pelican 5) and Sagres STC (Pelican Mortgages No. 6) (Pelican 6).

The ratings on the Notes address the timely payment of interest and the ultimate payment of principal on or before the respective legal final maturity dates in December 2061 (Pelican 5) and December 2063 (Pelican 6).

The confirmations follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the September 2020 payment dates;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the Notes to cover the expected losses at the AAA (sf) rating level;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Pelican 5 and Pelican 6 are Portuguese securitisations collateralised by portfolios of residential mortgage loans originated and serviced by Caixa Económica Montepio Geral (Montepio); the transactions closed in March 2009 and March 2012, respectively. The Notes have been issued under the Sociedade de Titularização de Créditos regime.

PORTFOLIO PERFORMANCE
-- Pelican 5: As of the September 2020 payment date, one-to-two months, two-to-three months, and three-to-12 month delinquencies represented 0.02%, 0.02%, and 0.3% of the outstanding principal balance, respectively, while defaulted and written-off loans were 0.3%. Gross cumulative deemed principal losses were 1.1% of the original portfolio balance, with cumulative recoveries of 79.7% to date (including proceeds from defaulted loans repurchased by Montepio).

-- Pelican 6: As of the September 2020 payment date, one-to-two months, two-to-three months, and three-to-12 month delinquencies represented 0.1%, 0.1%, and 0.7% of the outstanding principal balance, respectively, while defaulted and written-off loans were 1.8%. Gross cumulative deemed principal losses were 5.2% of the original portfolio balance, with cumulative recoveries of 67.4% to date (including proceeds from defaulted loans repurchased by Montepio).

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD assumptions as follows:
-- For Pelican 5, the base case PD and LGD assumptions were updated to 7.3% and 13.2%, respectively.
-- For Pelican 6, the base case PD and LGD assumptions were updated to 9.3% and 25.6%, respectively.

CREDIT ENHANCEMENT
The subordination of the respective junior obligations and cash reserves provide credit enhancement to the Notes. As of the September 2020 payment dates, credit enhancement to the Class A Notes in Pelican 5 was 34.1%, unchanged since the last annual review of the transaction 12 months ago because of the pro rata amortisation of the notes; credit enhancement to the Class A Notes in Pelican 6 increased to 50.3% from 44.7% at the time of the last annual review 12 months ago.

The transactions benefit from credit support provided by amortising cash reserves. For Pelican 5, the reserve was at its target balance of EUR 14.7 million as of the September 2020 payment date, equal to the higher of 3% of the balance of notes outstanding and the floor of EUR 10.0 million. The cash reserve is available to cover senior expenses and interest payments on the mortgage-backed notes and to clear principal deficiency ledger (PDL) balances.

For Pelican 6, the cash reserve account is divided into two ledgers: the General Ledger, available to cover senior expenses and interest payments on the Class A Notes and to clear the Class A PDL; and the Shortfall Liquidity Ledger, which is available to cover senior expenses and interest payments on the Class A Notes. As of the September 2020 payment date, the General Ledger was at its target level of EUR 30.0 million, equal to the floor level, while the Shortfall Liquidity Ledger was funded to its target level equal to the interest amount due on the Class A Notes on the subsequent payment date and the amounts paid under the senior items of the interest priority of payments on the most recent payment date.

Citibank N.A., London branch (Citibank London) acts as the account bank for both transactions. Based on the DBRS Morningstar private rating of Citibank London and mitigating factors inherent in the transaction structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Credit Agricole Corporate & Investment Bank (CA-CIB) acts as the swap counterparty for Pelican 5. The DBRS Morningstar private rating for CA-CIB is consistent with the First Rating Threshold as described in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar analysed the transaction structures in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many RMBS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For these transactions, DBRS Morningstar increased the expected default rates for self-employed borrowers, assumed a moderate decline in residential property prices, and conducted additional sensitivity analysis to determine that the transactions benefit from sufficient liquidity support to withstand high levels of payment holidays in the portfolio.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

A review of the transactions legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports provided by Citibank London and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating actions on the transactions took place on 30 October 2019, when DBRS Morningstar upgraded the ratings of the Notes to AAA (sf) from AA (high) (sf).

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

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

-- DBRS Morningstar 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.
-- For Pelican 5, the base case PD and LGD assumptions for the remaining collateral pool are 7.3% and 13.2%, respectively. At the AAA (sf) rating level, the corresponding PD and LGD are 29.9% and 35.8%, respectively.
-- For Pelican 6, the base case PD and LGD assumptions for the remaining collateral pool are 9.3% and 25.6%, respectively. At the AAA (sf) rating level, the corresponding PD and LGD are 34.2% and 50.0%, respectively.

-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of both the Pelican 5 and Pelican 6 Class A Notes would be expected to remain at AAA (sf), ceteris paribus. If the PD increases by 50%, the ratings of the Pelican 5 Class A Notes would be expected to decrease to A (high) (sf), while the rating of the Pelican 6 Class A Notes would be expected to remain at AAA (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the ratings of both the Pelican 5 and Pelican 6 Class A Notes would be expected to remain at AAA (sf).

Pelican 5 Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Pelican 6 Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Daniel Rakhamimov, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 24 February 2011 (Pelican 5); 5 March 2012 (Pelican 6)

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of these transactions can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (22 April 2020),
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (21 September 2020) and European RMBS Credit Model v 1.0.0.0,
https://www.dbrsmorningstar.com/research/366958/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020),
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at https://www.dbrsmorningstar.com/research/278375.

For more information on these credits or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].