Morningstar DBRS Confirms Santander Totta S.A. Covered Bonds (Obrigações Cobertas - Mortgages) at AA

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AA ratings on the Obrigações Cobertas (the Portuguese legislative covered bonds) issued under the Banco Santander Totta S.A. (Totta or the Issuer) EUR 12.5 billion programme (the Programme). The confirmation follows the completion of a full review of the Programme.

There are 17 series of Covered Bonds (CB) outstanding under the Programme totalling a nominal amount of EUR 10.83 billion.

The ratings are 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 (COR) associated with Totta, but Morningstar DBRS considers Portugal a jurisdiction for which CBs are a particularly important financing tool. As such, the CBAP is set at the level of the Issuer Rating plus one notch.
-- An LSF Assessment of "Strong" associated with the programme.
-- A Cover Pool Credit Assessment (CPCA) of BB, which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L). Notwithstanding, the programme could achieve an LSF-L of A (high) without a CPCA assigned as the LSF-L is equal to the CBAP.
-- An LSF-L of A (high).
-- A two-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 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 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 ratings. In addition, all else unchanged, the CB ratings would be downgraded if the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for good recovery prospects.
The vast majority of the loans in the CP (approximately 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 roughly 17.5 years based on a 0% prepayment rate, which is longer than the 4.2 years of WA life on the CB, not accounting for any maturity extension. This risk is mitigated by the extended maturity date, which falls one year after the maturity date, 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's credit ratings on the CB series outstanding 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's credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS's 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.

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

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 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.
Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent 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 and loan-by-loan data on the CP as at 31 March 2024, 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 impact the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing these 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 rating action on this transaction took place on 29 May 2024, when Morningstar DBRS assigned AA rating to Santander Totta S.A. Covered Bonds (Obrigações Cobertas - Mortgages) Series 37.

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: 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.8.0.0.0,
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 [email protected]