Press Release

DBRS Morningstar Confirms “A” Credit Rating on Banco Comercial Português S.A. Covered Bonds (Obrigacoes Cobertas - Mortgages)

Covered Bonds

December 22, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its “A” credit ratings on the Obrigações Cobertas (formerly designated “Obrigações Hipotecárias”; the Portuguese legislative Covered Bonds) issued under the Banco Comercial Português (BCP or the Issuer) Covered Bonds programme (the Programme).

The Programme has been converted to the updated Portuguese covered bonds (CB) law (the Legal Regime of Covered Bonds). The law transposes the European Union’s CB Directive 2019/2162, 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 “Average” LSF Assessment assigned previously.

On 18 December 2023, DBRS Morningstar upgraded its long-term ratings on the Issuer, including its Long-Term Issuer Rating to BBB from BBB (low) and its Long Term Critical Obligations Rating (COR) to A (low) from BBB (high). For more information, please see the relevant press release at https://www.dbrsmorningstar.com/research/425442.

There are four series of Obrigações Cobertas (OC) outstanding under the Programme totalling a nominal amount of EUR 9.20 billion.

The credit ratings are based on the following analytical considerations:
-- A CBAP of A (low), which is the LT COR of BCP. BCP is the Issuer of and Reference Entity (RE) for the Programme. DBRS Morningstar considers Portugal as a jurisdiction in which CBs are a particularly important financing tool.
-- A Legal and Structuring Framework (LSF) Assessment of “Strong” associated with the Programme.
-- An LSF-L of A (low).
-- A one-notch uplift for good recovery prospects.
-- A committed minimum overcollateralisation (OC) of 14.0%. DBRS Morningstar gives full credit to such commitment in accordance with its methodology. Such a level is not subject to haircut as DBRS Morningstar considers it to be persistent based on historically observed levels.
-- 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 and recoveries of the assets, interest rate stresses, and market value spreads to calculate liquidation values on the cover pool (CP).

Everything else being equal, a downgrade of the CBAP by two notches would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the CB ratings.

In addition, all else unchanged, DBRS Morningstar would downgrade the CB credit ratings if the quality of the CP and the level of OC were no longer sufficient to support a one-notch uplift for good recovery prospects.

The total outstanding amount of OC under the Programme is currently EUR 9.2 billion, while as of September 2023, the aggregate balance of mortgages in the CP was EUR 10.9 billion. This resulted in a total estimated OC of 18.4%. The Issuer has publicly committed to maintaining an OC level of 14.0%.

As of 30 September 2023, the CP comprised 181,608 residential mortgage loans granted to individuals, with an average loan amount of EUR 59,997. The weighted-average (WA) current loan-to-value ratio was 50.8% with a seasoning of 107 months. The pool is located mainly in Lisbon (45.0%), northern Portugal (28.4%), and central Portugal (13.6%).

Of the loans in the portfolio, 79.1% pay a floating interest rate and 18.9% pay a fixed rate; while 100% of the covered bonds are floating rate. This asset-liability mismatch is mitigated by the available OC.

The DBRS Morningstar-calculated WA life of the mortgage assets is roughly 13.1 years, which is longer than the WA life of 2.2 years on the covered bonds, not accounting for any maturity extension. This generates an asset-liability mismatch that is mitigated by the available OC and the extended maturity date, which falls one year after the maturity date.

All CP assets and covered bonds are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.

DBRS Morningstar assessed the LSF related to the Programme as “Strong” according to its “Global Methodology for Rating and Monitoring Covered Bonds”. For more information, please refer to the publication “Portuguese Covered Bonds: Legal and Structuring Framework Review” both available at www.dbrsmorningstar.com.

For further information on the Programme, please refer to the rating report at www.dbrsmorningstar.com.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on Banco Comercial Português, S.A. are likely to have an impact on these credit ratings. ESG factors that have a significant or relevant effect on the credit analysis of Banco Comercial Português, S.A. are discussed separately at https://www.dbrsmorningstar.com/issuers/17915.

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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (4 July 2023).

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to these credit ratings is “Global Methodology for Rating and Monitoring Covered Bonds” (8 May 2023).

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

In DBRS Morningstar’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS Morningstar focused on the cash flow analysis.

A review of the transaction legal documents was focused on the changes in the Programme’s documentation aimed at aligning the Programme with the Legal Regime of Covered Bond.

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/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 credit ratings include investor reports 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 the information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 24 May 2023, when DBRS Morningstar confirmed its “A” credit ratings on BCP´s outstanding OH following an amendment to Series 8’s final terms.

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: Alejandro Tendero Delicado, Assistant Vice President, Credit Ratings
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 28 February 2012

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

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].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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