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

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

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

The rating on the Class A Notes addresses the timely payment of interest and the 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 as of the May 2021 payment date;
-- 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 their respective rating levels;
-- Current economic environment and sustainable performance assessment, as a result of the Coronavirus Disease (COVID-19) outbreak.

The Issuer 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 rental agreements are included in the pool. Under these agreements, a third party (the dealer or vehicle supplier) undertakes to repurchase the related asset at the contract maturity if not purchased by the obligor, at a price agreed between Montepio Crédito and the third party at origination. If the relevant party 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 the May 2021 payment date, one-to-two and two-to-three month delinquencies represented 0.9% and 0.2% of the outstanding collateral balance, respectively, while three-to-six month delinquencies represented 0.6%. Gross cumulative defaults, defined as receivables six months or greater in arrears, amounted to 1.6% of the aggregate original portfolio balance, with cumulative recoveries of 42.5% to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 9.0% and 87.9%, respectively.

CREDIT ENHANCEMENT
The subordination of the respective junior obligations and the cash reserve provide credit enhancement to the rated notes. As of the May 2021 payment date, credit enhancement to the Class A Notes increased to 96.0% from 62.1% at the time of the last annual review 12 months ago; credit enhancement to the Class B Notes increased to 73.1% from 47.1%. The increased credit enhancements prompted the upgrades of the rated notes.

The transaction benefits from a nonamortising cash reserve, funded to EUR 7.0 million 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 repayment 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 May 2021 payment date, the reserve was at its target balance of EUR 7.0 million.

Deutsche Bank AG, London Branch (DB London) acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of DB London, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, 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.

DBRS Morningstar analysed the transaction structure 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 continue to increase in the coming months for many ABS transactions, some meaningfully. The ratings are based on additional analysis and, where appropriate, adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar applied an additional haircut to its base case recovery rate and conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolio. As of the May 2021 payment date, 11.2% of the pool benefitted from payment holidays.

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 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-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 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated ABS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360734/european-abs-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 the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

Given the large share of commercial obligors in the transaction, results from the DBRS Morningstar SME Diversity Model were incorporated into the analysis. For more information on DBRS Morningstar considerations for European SME transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/361098.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (8 February 2021). DBRS Morningstar 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 at: http://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 and information provided by DB London (as the Transaction Manager), and loan-level data provided by Montepio Crédito.

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 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 action on this transaction took place on 6 April 2021, when DBRS Morningstar upgraded its rating on the Class B Notes to AA (low) (sf) from A (high) (sf), following finalisation of the updated “Legal Criteria for European Structured Finance Transactions” methodology.

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.
-- The base case PD and LGD of the current pool of loans for the Issuer are 9.0% and 87.9%, respectively.
-- RV Loss of 50.5% and 47.1% at the AAA (sf) and AA (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 remain at AAA (sf), ceteris paribus. If the RV Loss increases by 50%, the rating of the Class A Notes would be expected to remain at AAA (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 remain at AAA (sf).

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

Class B Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and LGD, expected rating of AA (high) (sf)
-- 25% increase in RV Loss, expected rating of AA (high) (sf)
-- 50% increase in RV Loss, expected rating of AA (high) (sf)
-- 25% increase in RV Loss and 25% increase in PD and LGD, expected rating of AA (high) (sf)
-- 25% increase in RV Loss and 50% increase in PD and LGD, expected rating of AA (high) (sf)
-- 50% increase in RV Loss and 25% increase in PD and LGD, expected rating of AA (high) (sf)
-- 50% increase in RV Loss and 50% increase in PD and LGD, expected rating of AA (high) (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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

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

DBRS Ratings GmbH
Neue Mainzer Straße 75
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 this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (8 February 2021), https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (21 July 2020), https://www.dbrsmorningstar.com/research/364305/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021), https://www.dbrsmorningstar.com/research/376314/legal-criteria-for-european-structured-finance-transactions.
-- Rating CLOs Backed by Loans to European SMEs (30 September 2020) and DBRS Diversity Model v2.5.0.0,
https://www.dbrsmorningstar.com/research/367642/rating-clos-backed-by-loans-to-european-smes.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021),
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].