Morningstar DBRS Confirms Credit Rating on Sagres STC (Pelican Mortgages No. 4)

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit rating on the Class A Notes issued by Sagres STC (Pelican Mortgages No. 4) (the Issuer) at AAA (sf).

The credit rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in September 2056.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the December 2023 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the notes to cover the expected losses at the AAA (sf) credit rating level.

The transaction is a securitisation of Portuguese first-lien residential mortgage loans originated and serviced by Caixa Económica Montepio Geral. The notes were issued under the Sociedade de Titularização de Créditos regime. The transaction closed in May 2008.

PORTFOLIO PERFORMANCE
As of the December 2023 payment date, one- to two-month, two- to three-month, and three- to 12-month delinquencies represented 0.12%, 0.05%, and 0.07% of the outstanding principal balance of the portfolio, respectively, while defaulted and written-off loans represented 0.02%. Gross cumulative deemed principal losses amounted to 1.4% of the original portfolio balance, with cumulative recoveries of 88.2%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base-case PD and LGD assumptions to 4.7% and 5.6%, respectively.

CREDIT ENHANCEMENT
The subordination of the junior obligations (the unrated Class B to Class E Notes) and the cash reserve provide credit enhancement to the Class A Notes. As of the December 2023 payment date, credit enhancement to the Class A Notes remained at 24.3%, which is unchanged from 12 months ago as the Class A to Class E Notes continue to amortise on a pro rata basis.

As of the December 2023 payment date, the cash reserve account was at its target balance of EUR 10.6 million, 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 balances.

Citibank N.A./London Branch (Citibank) acts as the account bank for the transaction. Based on Morningstar DBRS’ private credit rating on Citibank, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit rating assigned to the Class A Notes, as described in Morningstar DBRS’ "Legal Criteria for European Structured Finance Transactions" methodology.

The Royal Bank of Scotland NV, London Branch (RBS) acts as the hedge counterparty for the transaction. As Morningstar DBRS does not rate RBS, Morningstar DBRS did not consider the swap agreement in the cash flow analysis of the transaction.

Morningstar DBRS’ credit rating on the rated notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS’ long-term credit rating provides opinions on risk of default. Morningstar DBRS 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
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://dbrs.morningstar.com/research/427030 (23 January 2024).

Morningstar DBRS analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is the “Master European Structured Finance Surveillance Methodology” (11 December 2023), https://dbrs.morningstar.com/research/425148.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS 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 credit rating action.

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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include investor reports provided by Citibank and loan-level data provided by the European DataWarehouse GmbH.

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

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

Morningstar DBRS considers the data and information available to it for the purpose of providing this credit rating to be of satisfactory quality.

Morningstar DBRS 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 15 March 2023, when Morningstar DBRS confirmed its credit rating of AAA (sf) on the Class A Notes.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available at dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- Morningstar DBRS 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 4.7% and 5.6%, respectively. At the AAA (sf) credit rating level, the corresponding PD is 27.5% and the LGD is 29.1%.

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

For further information on Morningstar DBRS 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 Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This credit rating is 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 Credit Rating Date: 24 February 2011

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://dbrs.morningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425148.
-- 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://dbrs.morningstar.com/research/420575.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030.

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].