Morningstar DBRS Confirms Credit Rating on Lusitano Mortgages No. 7 Designated Activity Company

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AAA (sf) credit rating on the Class A Notes issued by Lusitano Mortgages No. 7 Designated Activity Company (the Issuer).

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 October 2064.

CREDIT RATING RATIONALE
The credit rating 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 July 2024 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) credit rating level.

The transaction is a securitisation of Portuguese residential mortgage loans originated by Banco Espírito Santo (BES). Following a resolution measure that the Bank of Portugal applied to BES in August 2014, the good assets and liabilities were transferred to Novo Banco, S.A., which assumed servicing responsibilities for the portfolio. The transaction had a 3-year revolving period which ended in 2011.

PORTFOLIO PERFORMANCE
As of July 2024 payment date, two- to three-month arrears represented 0.2% of the outstanding portfolio balance and the more than three-month delinquency ratio was 0.3%. Gross cumulative defaults as a percentage of the original balance of the aggregate initial and additional portfolio balances were 8.8%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted an analysis of the current pool of receivables and updated its base-case PD and LGD assumptions at the B (sf) credit rating level to 9.6% and 10.0%, respectively.

CREDIT ENHANCEMENT
As of the July 2024 payment date, credit enhancement to the Class A Notes was 69.9%, up from 62.9% at the previous review. Credit enhancement is expressed as portfolio overcollateralisation and does not include the reserve fund.

The transaction benefits from a reserve fund, currently at its target level of EUR 41.8 million, that is available to cover senior fees and any interest shortfall on the Class A and Class B Notes.

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.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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
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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781.

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 rating is "Master European Structured Finance Surveillance Methodology" (6 August 2024): https://dbrs.morningstar.com/research/437540.

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 Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for this credit rating include investor reports provided by Citibank N.A./London Branch, 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 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 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 3 October 2023, when Morningstar DBRS confirmed its AAA (sf) credit rating on the Class A Notes.

Information regarding Morningstar DBRS credit ratings, including definitions, policies and methodologies is available at https://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 at the B (sf) credit rating level are 9.6% and 10.0%, respectively.
-- The risk sensitivity overview below illustrates the credit ratings expected if the PD and LGD increase by a certain percentage over the base case assumption.

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 AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AAA (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: Rehanna Sameja, Senior Vice President
Initial Rating Date: 28 February 2011

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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.

-- Legal Criteria for European Structured Finance Transactions (28 June 2024),
https://dbrs.morningstar.com/research/435165
-- Master European Structured Finance Surveillance Methodology (6 August 2024),
https://dbrs.morningstar.com/research/437540
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024),
https://dbrs.morningstar.com/research/437781
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024)
https://dbrs.morningstar.com/research/439571
-- European RMBS Insight Methodology (18 September 2024) and European RMBS Insight model v 10.0.0.0,
https://dbrs.morningstar.com/research/439573
-- European RMBS Insight: Portuguese Addendum (19 April 2024),
https://dbrs.morningstar.com/research/431376
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024)
https://dbrs.morningstar.com/research/439913

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.