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 2021 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 2021 payment date, one-to-two month, two-to-three month, and three-to-12 month delinquencies represented 0.04%, 0.07%, and 0.08% of the outstanding principal balance, respectively, while defaulted and written-off loans were 0.3%. Gross cumulative deemed principal losses were 1.2% of the original portfolio balance, with cumulative recoveries of 82.0% to date (including proceeds from defaulted loans repurchased by Montepio in July 2019).

-- Pelican 6: As of the September 2021 payment date, one-to-two month, two-to-three month, and three-to-12 month delinquencies represented 0.2%, 0.2%, and 0.3% of the outstanding principal balance, respectively, while defaulted and written-off loans were 1.4%. Gross cumulative deemed principal losses were 5.3% of the original portfolio balance, with cumulative recoveries of 73.1% to date (including proceeds from defaulted loans repurchased by Montepio in July 2019).

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 6.3% and 9.0%, respectively.
-- For Pelican 6, the base case PD and LGD assumptions were updated to 7.8% and 19.7%, respectively.

CREDIT ENHANCEMENT
The subordination of the respective junior obligations and cash reserves provide credit enhancement to the Notes. As of the September 2021 payment dates, credit enhancement to the Class A Notes in Pelican 5 remained at 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 55.5% from 50.3% 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 13.4 million as of the September 2021 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 2021 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 immediate economic contraction, leading in some cases to 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 RMBS transactions. The ratings are based on additional analysis 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 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. As of 30 September 2021, loans amounting to 15.7% (Pelican 5) and 18.0% (Pelican 6) of the outstanding performing portfolios balance were under COVID-19 payment moratoria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated RMBS transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 these transactions took place on 28 October 2020, when DBRS Morningstar confirmed the ratings on the Notes at AAA (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 6.3% and 9.0%, respectively. At the AAA (sf) rating level, the corresponding PD and LGD are 28.5% and 30.5%, respectively.
-- For Pelican 6, the base case PD and LGD assumptions for the remaining collateral pool are 7.8% and 19.7%, respectively. At the AAA (sf) rating level, the corresponding PD and LGD are 31.0% and 45.6%, 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 the Pelican 6 Class A Notes would be expected to remain at AAA (sf), ceteris paribus. If the PD increases by 50%, 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 rating of the 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 AAA (sf)
-- 50% increase in PD, expected rating of AA (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 AA (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. 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: 24 February 2011 (Pelican 5); 5 March 2012 (Pelican 6)

DBRS Ratings GmbH
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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 (8 February 2021),
https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (17 September 2021) and European RMBS Credit Model v 1.0.0.0, https://www.dbrsmorningstar.com/research/384582/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-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 these credits or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].