DBRS Morningstar Confirms AA (high) Credit Ratings on Caixa Geral De Depósitos S.A. Covered Bonds (Obrigações Cobertas - Mortgages)

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (high) credit ratings on the Obrigações Cobertas (formerly designated Obrigações Hipotecárias; the Portuguese legislative covered bonds) issued under Caixa Geral de Depósitos, S.A.’s (CGD or the Issuer) covered bond programme (the programme). The confirmations follow the completion of DBRS Morningstar’s full review of the credit ratings.

The programme has been converted to adhere to the updated Portuguese covered bonds (CB) law (the Legal Regime of Covered Bonds). The law transposes the European Union’s CB Directive, which outlines the harmonisation of CB frameworks across Europe, into Portuguese law. Following the conversion, DBRS Morningstar assigned a Legal and Structuring Framework (LSF) Assessment of “Strong” to the programme, instead of the “Adequate” LSF Assessment assigned previously.

As of the date of this press release, the total amount of bonds outstanding under the programme was EUR 3 billion spread across two series, both retained.

The credit ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A”, which is CGD’s Long Term Critical Obligations Rating. CGD is the Issuer and the Reference Entity (RE) for the programme. DBRS Morningstar considers Portugal a jurisdiction for which CBs are a particularly important financing tool and the assets in the programme to be strategic to the RE’s core activity.
-- A Legal and Structuring Framework (LSF) Assessment of “Strong” associated with the programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB, which is the lowest CPCA in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AA (low).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 28% to which DBRS Morningstar gives credit, which is the level of OC the Issuer commits to maintain as stated in its quarterly investor reports. This level is not subject to haircut as DBRS Morningstar observed that it has been stable for the past 24 months.
-- The sovereign rating on the Republic of Portugal, rated “A” with a Stable trend by DBRS Morningstar, as of the date of this press release.

DBRS Morningstar analysed the transaction with its European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults, recoveries of the assets, and interest rate stresses, as well as market value spreads to calculate liquidation values on the cover pool (CP).

Everything else equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the covered bonds credit ratings. In addition, the CB credit ratings would be downgraded if any of the following occurred: (1) the sovereign rating on the Republic of Portugal was downgraded below A (low); (2) the CPCA was downgraded below BBB; (3) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (4) the relative amortisation profile of the CBs and CP moved adversely; (5) the LSF Assessment associated with the programme was downgraded to Average or below; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

As of September 2023, the total CP balance was roughly EUR 6.89 billion, including EUR 6.85 billion of mortgages and EUR 36.2 million of eligible securities and cash. There are currently EUR 3 billion of covered bonds outstanding under the programme with an estimated total OC of 129.5%.

As of September 2023, the mortgage CP comprised 182,455 residential mortgages granted to individuals with an average loan amount of EUR 37,543. The weighted-average (WA) unindexed loan-to-value ratio of the mortgages was 45.9% with a WA seasoning of 183.9 months. The CP was mainly distributed in Lisbon (35.97% by outstanding balance), Northern Portugal (25.02%), and Central Portugal (20.90%).

The majority of the loans in the CP (97.37%) pay a floating interest rate indexed to Euribor while 100% of the covered bonds pay a floating rate. The interest rate mismatch in this transaction is negligible, but DBRS Morningstar accounted for it in its analysis.

The CP assets and the CBs are all denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.

As of the date of this press release, the DBRS Morningstar-calculated WA life of the CP was 13.3 years based on a 0% prepayment rate, which is longer than the WA life of 3.7 years on the CBs when considering the expected maturity. This risk is mitigated by the extended maturity dates, which fall one year after the maturity dates, and by the OC in place.

DBRS Morningstar has assessed the LSF related to the programme as “Strong” according to its rating methodology. For more information, please refer to DBRS Morningstar’s publication “Portuguese Covered Bonds: Legal and Structuring Framework Review”, available at www.dbrsmorningstar.com.

DBRS Morningstar’s credit ratings on the outstanding CB series address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related interest payment amounts and the related principal amount.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on the Issuer are likely to have an impact on this credit rating.
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/416784.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is: “Global Methodology for Rating and Monitoring Covered Bonds” (8 May 2023), https://www.dbrsmorningstar.com/research/413651.

Other methodologies referenced in this transaction are listed at the end of this press release.
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 focused on the changes in the Programme’s documentation aimed at aligning it with the new CB legal framework (November 2023).

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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/421590.

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.

The sources of data and information used for this credit rating include dynamic performance data, stratification tables, and loan-by-loan-level information on the CP as of September 2023 provided by the Issuer.

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

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

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

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

The last credit rating action on this transaction took place on 8 June 2023, when DBRS Morningstar upgraded its credit ratings on the CB series outstanding under the Programme to AA (high) from AA.

The lead analyst responsibilities for this transaction have been transferred to Marcos Meier.

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

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Marcos Meier, Senior Analyst
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 10 September 2012

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

-- Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023),
https://www.dbrsmorningstar.com/research/413651/global-methodology-for-rating-and-monitoring-covered-bonds.
-- Global Methodology for Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (8 May 2023),
https://www.dbrsmorningstar.com/research/413652/global-methodology-for-rating-and-monitoring-covered-bonds-addendum-market-value-spreads.
-- Global Methodology for Rating Banks and Banking Organisations (22 June 2023),
https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (13 September 2023) and European RMBS Credit Model v 1.0.0.0,
https://www.dbrsmorningstar.com/research/420575/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023),
https://www.dbrsmorningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers.
-- Global Methodology for Rating Sovereign Governments (6 October 2023),
https://www.dbrsmorningstar.com/research/421590/global-methodology-for-rating-sovereign-governments.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023),
https://www.dbrsmorningstar.com/research/416784/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].