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

DBRS Ratings GmbH (Morningstar DBRS) confirmed its “A” credit ratings on the Obrigações Cobertas (the Portuguese legislative Covered Bonds) issued under the Banco Comercial Português, S.A. (BCP or the Issuer) Covered Bonds programme (the Programme). The confirmation follows the completion of a full review of the credit ratings.

There are four series of covered bonds (CBs) outstanding under the Programme, totalling a nominal amount of EUR 9.20 billion.

CREDIT RATING RATIONALE
The credit ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (low), which is the Long Term Critical Obligations Rating of BCP. BCP is the Issuer of and Reference Entity for the Programme. Morningstar DBRS 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%. Morningstar DBRS gives full credit to such commitment in accordance with its methodology. Such a level is not subject to haircut as Morningstar DBRS considers it to be persistent based on historically observed levels.
-- The sovereign credit rating on the Republic of Portugal, rated “A” with a Stable trend by Morningstar DBRS, as of the date of this press release.

Morningstar DBRS analysed the transaction using 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 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 credit ratings.

In addition, all else unchanged, Morningstar DBRS 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 Obrigações Cobertas under the Programme is currently EUR 9.2 billion, while as of December 2023, the aggregate balance of mortgages and other assets in the CP was EUR 10.9 billion. This resulted in a total estimated OC of 18.8%. The Issuer has publicly committed to maintaining an OC level of 14.0%.

As of 31 December 2023, the CP comprised 178,723 residential mortgage loans granted to individuals, with an average loan amount of EUR 60,854. The weighted-average (WA) current loan-to-value ratio was 50.9% with a seasoning of 105 months. The pool is located mainly in Lisbon (45.1%), northern Portugal (28.4%), and central Portugal (13.6%).

Of the loans in the portfolio, 76.7% pay a floating interest rate and 23.4% pay a fixed rate, while 100% of the CBs are floating rate. This asset-liability mismatch is mitigated by the available OC.

The Morningstar DBRS-calculated WA life of the mortgage assets is roughly 16.2 years, which is longer than the WA life of 1.8 years on the CBs, 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 CBs are denominated in euros. As such, investors are not currently exposed to any foreign exchange risk.

Morningstar DBRS 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”, available at https://dbrs.morningstar.com.

Morningstar DBRS’ credit ratings on the covered bonds issued under this Programme 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 balance.

Morningstar DBRS’ long-term credit ratings provide 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. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

For further information on the Programme, please refer to the rating report at dbrs.morningstar.com.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on BCP are likely to have an impact on these credit ratings.

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.

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://dbrs.morningstar.com/research/413651.

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

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

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 these credit ratings include investor reports, loan-by-loan data on the CP as of 31 December 2023, and static performance data for delinquencies from 2003 to 2023 provided by the Issuer.

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 affect the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings 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 22 December 2023, when Morningstar DBRS confirmed its “A” credit ratings on BCP’s outstanding Obrigações Cobertas.

The lead analyst responsibilities for this transaction have been transferred to Alejandro Tendero Delicado.

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

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.

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

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

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

-- Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023),
https://dbrs.morningstar.com/research/413651
-- Global Methodology for Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (8 May 2023), https://dbrs.morningstar.com/research/413652
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (Master Methodology and Portugal Addendum) (13 September 2023) and European RMBS Credit Model version 1.0.0.0,
https://dbrs.morningstar.com/research/420575
-- Global Methodology for Rating Banks and Banking Organisations (22 June 2023),
https://dbrs.morningstar.com/research/415978
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023),
https://dbrs.morningstar.com/research/420573
-- 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
-- Global Methodology for Rating Sovereign Governments (6 October 2023),
https://dbrs.morningstar.com/research/421590
-- 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].