DBRS Morningstar Assigns Ratings to TAGUS - Sociedade de Titularização de Créditos, S.A. (RMBS Belém No.2)

DBRS Ratings GmbH (DBRS Morningstar) assigned the following ratings to the notes issued by TAGUS - Sociedade de Titularização de Créditos, S.A. (RMBS Belém No.2) (the Issuer):

-- Class A notes rated AAA (sf)
-- Class B notes rated A (high) (sf)

DBRS Morningstar does not rate the Class C notes also issued in this transaction.

The rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in 2064. The rating on the Class B notes addresses the ultimate payment of interest and the ultimate repayment of principal on or before the final maturity date.

Unión de Créditos Inmobiliarios, S.A. E.F.C. – Sucursal em Portugal (UCI Portugal or the originator) originated the mortgage loans. The Issuer will use the proceeds from the issuance of the Class A and Class B notes (collectively, the rated notes), and part of the proceeds from the issuance of the Class C notes to purchase a portfolio of prime first-lien mortgages secured over owner-occupied residential properties located in Portugal.

RATING RATIONALE
The transaction benefits from credit enhancement provided in the form of subordination and an amortising reserve fund that provides liquidity support to the rated notes.

Up to and including the September 2027 payment date, the Class A notes will pay a floating coupon rate of three-month Euribor + 0.70%. Following the September 2027 payment date, the Class A notes will step up to pay a coupon equal to three-month Euribor + 1.40%, and the Euribor payable on the Class A notes is subject to a maximum of 5%. The Class B notes will pay a fixed coupon rate of 1.25% and the Class C notes a fixed coupon rate of 2.25% during the life of the transaction. The notes will pay interest on a quarterly basis.

To account for interest rate risk between the notes and the cover pool (comprising 2.8% fixed-rate loans for life, 44.9% short-term fixed-rate loans with a mandatory switch to floating rate, and 52.2% floating-rate loans linked to six-month Euribor (51.7%) or 12-month Euribor (0.6%)), DBRS Morningstar stressed the cash flows in accordance with its “Interest Rate Stresses for European Structured Finance Transactions” methodology. DBRS Morningstar also stressed the basis risk between the reference rate of the Class A notes and the portfolio by applying rating-dependent haircuts after following the historical evolution of their indexes.

As of 5 October 2022, the portfolio consisted of 2,818 loans extended to 2,818 borrowers with an aggregate principal balance of EUR 325 million. UCI Portugal originated all of the loans. The weighted average (WA) seasoning of the pool is 3.7 years and the WA remaining term is 26.5 years.

About 3.7% of the loans were originated between 2002 and 2008, which have shown the worst historical performance in line with the general European trend. Most of the portfolio (96.3%) was originated in 2009 or thereafter. These newer originations are expected to perform better than the pre-crisis vintages because of tighter underwriting criteria. In addition, a small share (1.8%) of the loans in the portfolio have been restructured or have been in arrears for more than 30 days and none after July 2018.

A small portion (5.1% by balance) of the loans in the portfolio are bridge loans, which are granted to borrowers purchasing a new home but who had not yet sold their current residence. About 14.6% of the portfolio were previously bridge loans but the second property has since been sold. For the loans that are currently bridge loans, only the loans on the new property are securitised, the other loan is not in the pool and it is not securitised.

Borrower collections are held with Banco Santander Totta SA (rated “A” with a Stable trend by DBRS Morningstar) and are deposited on the next business day into the Issuer transaction account held with Citibank Europe plc (rated AA (low) with a Stable trend by DBRS Morningstar). Based on DBRS Morningstar’s rating on the account bank and the downgrade provisions outlined in the transaction documents, 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 based its ratings on the following analytical considerations:
-- The transaction capital structure, and form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection activities. DBRS Morningstar calculated probability of default, loss given default, and expected loss outputs on the mortgage portfolio, which DBRS Morningstar used as inputs into its cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the noteholders according to the terms and conditions of the notes.
--The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents and the reserve fund.
-- DBRS Morningstar’s sovereign rating on the Republic of Portugal at A (low) with a Stable trend as of the date of this press release.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

The ratings on the Class B notes materially deviate from the higher rating implied by the quantitative model. DBRS Morningstar considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by a quantitative model that is a substantial component of a rating methodology. In this case, the ratings address the ultimate payment of interest and principal on or before the final maturity date as defined in the transaction legal documents. DBRS Morningstar typically expects bonds rated in the AA (sf) category to be able to pay interest on a timely basis at the time they are the most senior bond outstanding.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

DBRS Morningstar analysed the transaction structure in Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” (8 July 2022).

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.

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/401817/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 UCI Portugal and its agents. DBRS Morningstar was provided with loan-level data as of 5 October 2022, and historical performance data (three-plus and six-plus months delinquencies, constant defaults, payment data, and prepayment rates) as well as repossession data from 2009 to 2022.

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

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.

These ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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

Sensitivity Analysis: 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):

-- In respect of the Class A notes, a PD of 26.6% and LGD of 39.5%, corresponding to the AAA (sf) rating scenario, were stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B notes, a PD of 15.6% and LGD of 29.7%, corresponding to the A (high) (sf) rating scenario, were stressed assuming a 25% and 50% increase in the PD and LGD.

DBRS Morningstar concludes the following impact on the Class A notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to AA (high) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AA (high) (sf);
-- 25% increase of the LGD, ceteris paribus, would not lead to a downgrade;
-- 50% increase of the LGD, ceteris paribus, would not lead to a downgrade;
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (high) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (high) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (high) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (high) (sf).

DBRS Morningstar concludes the following impact on the Class B notes:
-- 25% increase of the PD, ceteris paribus, would not lead to a downgrade;
-- 50% increase of the PD, ceteris paribus, would not lead to a downgrade;
-- 25% increase of the LGD, ceteris paribus, would not lead to a downgrade;
-- 50% increase of the LGD, ceteris paribus, would not lead to a downgrade;
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would not lead to a downgrade;
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would not lead to a downgrade;
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would not lead to a downgrade ;
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (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: Marcos Meier, Senior Analyst, Credit Ratings
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 13 October 2022

DBRS Ratings GmbH, Sucursal en España
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (7 October 2022) and European RMBS Credit Model v 1.0.0.0,
https://www.dbrsmorningstar.com/research/403744/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022),
https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022),
https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022),
https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022),
https://www.dbrsmorningstar.com/research/396929/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].