Press Release

Morningstar DBRS Assigns AA Credit Rating to Banco Santander Totta S.A. Covered Bonds (Obrigações Cobertas - Mortgages) Series 37

Covered Bonds
May 29, 2024

DBRS Ratings GmbH (Morningstar DBRS) assigned credit rating of AA to the Series 37 Obrigações Cobertas (formerly designated Obrigações Hipotecárias; the Portuguese legislative covered bonds) issued under the Banco Santander Totta S.A. (Totta or the Issuer) EUR 12.5 billion programme (the programme).

At the same time, Morningstar DBRS discontinued its credit rating on the Series 22 (PTBSRIOE0024), which matured on 25 April 2024.

Series 37 is a EUR 1 billion fixed-rate bond that pays a coupon of 3.399% and matures on 29 May 2029. Following the issuance of Series 37, there are 17 series of covered bonds (CBs) outstanding under the programme, totalling a nominal amount of EUR 10.83 billion. All CBs issued under the programme rank pari passu with each other, and Morningstar DBRS currently rates them AA.

Morningstar DBRS has reviewed the updated prospectus of the programme dated as of 23 May 2024; however, this did not affect the rating analysis.

The credit rating is based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high). Totta is the Issuer of and Reference Entity for the programme. There is no Critical Obligations Rating assigned to Totta, but Morningstar DBRS considers Portugal a jurisdiction for which CBs are an important financing tool. As such, the CBAP is set at the level of the Issuer Rating plus one notch.
-- A Legal and Structuring Framework (LSF) Assessment of “Strong” associated with the programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AA (low).
-- A one-notch uplift for good recovery prospects.
-- A committed minimum overcollateralisation (OC) of 15%. Morningstar DBRS gives full credit to such commitment in accordance with its principal methodology. Such level is not subject to a 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 being equal, a one-notch downgrade of the CBAP 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, the CB credit ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded to below BBB (low); (2) the sovereign credit rating on the Republic of Portugal was downgraded to below A (low); (3) the LSF Assessment associated with the programme was downgraded; (4) the quality of the CP and the level of OC were no longer sufficient to support a one-notch uplift for good recovery prospects; (5) the relative amortisation profile of the CBs and the CP moved adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

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

The vast majority of the loans in the CP (98.9%) are floating rate, indexed to different bases, and they reset at different times, while all CB series are fixed rate. The resulting interest rate mismatch is mitigated by intra-group swap agreements that contain downgrade and collateral-posting language in line with Morningstar DBRS’ criteria and have been given full credit in Morningstar DBRS’ analysis.

The Morningstar DBRS-calculated weighted-average (WA) life of the mortgage assets is about 17 years based on a 0% prepayment rate, which is longer than the 4.3 years of WA life on the CBs, not accounting for any maturity extension. This risk is mitigated by the extended maturity dates, which fall one year after the maturity dates, and by the OC in place.

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

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

Morningstar DBRS’ credit rating on Series 37 addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for Series 37 are the related Interest Payment Amounts and the related Principal Balance.

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 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.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on the Issuer are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the Issuer are discussed separately at https://dbrs.morningstar.com/issuers/17714.

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 rating is: “Global Methodology for Rating and Monitoring Covered Bonds” (2 April 2024), https://dbrs.morningstar.com/research/430636.

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

In Morningstar DBRS’ opinion, the changes 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 limited to the final terms of Series 37 and the updated prospectus as of 23 May 2024.

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 Morningstar DBRS 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 and loan-by-loan data on the CP, static delinquencies (90 days+) by vintage of origination, spanning from 2003 to Q1 2016, and dynamic arrears data on the vintages 2000 to Q1 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 ratings, 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 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.

This credit rating concerns a newly issued financial instrument. This is the first Morningstar DBRS credit rating on this financial instrument.

The last credit rating action on this transaction took place on 7 March 2024, when Morningstar DBRS assigned a AA credit rating to the Series 36.

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.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Marcos Meier, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 27 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 (2 April 2024),
https://dbrs.morningstar.com/research/430636/global-methodology-for-rating-and-monitoring-covered-bonds.
-- Global Methodology for Rating Banks and Banking Organisations (15 April 2024),
https://dbrs.morningstar.com/research/431155/global-methodology-for-rating-banks-and-banking-organisations.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions.
-- European RMBS Insight Methodology (25 March 2024) and European RMBS Insight model v.7.0.1.0,
https://dbrs.morningstar.com/research/430103/european-rmbs-insight-methodology.
-- European RMBS Insight: Portuguese Addendum (19 April 2024),
https://dbrs.morningstar.com/research/431376/european-rmbs-insight-portuguese-addendum.
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024),
https://dbrs.morningstar.com/research/429054/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers.
-- Global Methodology for Rating Sovereign Governments (6 October 2023),
https://dbrs.morningstar.com/research/421590/global-methodology-for-rating-sovereign-governments.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 info-DBRS@morningstar.com.

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