DBRS Confirms Banco Comercial Português Covered Bonds Ratings, Keeps Under Review with Positive Implications

DBRS Ratings Limited (DBRS) has today confirmed its rating of A (low) on all outstanding series of obrigações hipotecárias (the Portuguese legislative covered bonds) issued under Banco Comercial Português (BCP or the Issuer) EUR 12,500,000,000 Covered Bonds Programme, and has kept them Under Review with Positive Implications following the amendments to Series 5, as executed on 9 May 2016.

According to its restated terms, Series 5, for EUR 1.35 billion, now matures on 18 May 2021 versus 18 May 2016 previously, and bears a margin of 0.5% (versus 2% previously) over 1-Month EURIBOR.

There are six series of covered bonds outstanding under the Programme, for a total amount of EUR 8.85 billion.

The rating of the covered bonds is under review as DBRS is expecting to receive an updated set of performance information for the Issuer. Upon receipt of satisfactory performance information, DBRS expects that the rating can be maintained at the current level or upgraded by up to two notches to A (high), based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB, being the Critical Obligations Rating (COR) of the Issuer.
-- A Legal and Structuring Framework (LSF) Assessment of “Average” assigned to BCP OH Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L). Such CPCA was determined with the use of performance data provided by the Issuer as at Q2 2014, along with stressed assumptions based on the performances of the eligible mortgage books of Portuguese banks, and may be subject to change upon receipt of satisfactory performance information.
-- An LSF-L of A (low).
-- Two notches uplift for high recovery prospects. DBRS has formed a view on the availability and sufficiency of the CP to satisfy the claims of the OH holders in a post-issuer insolvency scenario. This may be subject to change upon receipt of satisfactory performance information.
-- A level of overcollateralisation (OC) which DBRS gives credit to of 31%. Such level is not subject to haircut, as DBRS has observed it has been persistent for the past 24 months.

The transaction was modelled with the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and market spread values to calculate liquidation values on the cover pool (if any, at the Extended Maturity Date).

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch. In addition, everything else being equal, BCP OH ratings would be downgraded if the following occurred: (1) the CPCA were downgraded below BBB (low), (2) the sovereign rating of the Republic of Portugal were downgraded below BBB (low), (3) the LSF Assessment associated with the programme were downgraded, (4) the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects, (5) the relative amortisation profile of the OH and cover pool (CP) moved adversely or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

As of 31 March 2016, the CP amounts to EUR 11.594 billion, resulting in a nominal OC of 31.01%, which is above the current Issuer commitment OC of 31%, and entirely comprises residential mortgages, for a weighted-average loan amount of EUR 48,483.

The weighted-average (WA) current unindexed loan-to-value is 57.07% and most of the loans are floating rate (93.88% in terms of outstanding balance). The pool is well seasoned, the WA seasoning being 9.04 years, and it is mainly distributed in Lisbon (40.92% in terms of outstanding balance) and Northern Portugal (31.13%).

For further information on BCP OH programme, please refer to the rating report that can be found on www.dbrs.com.

DBRS has assessed the LSF related to BCP OH as “Average” according to its rating methodology. For more information, please refer to DBRS’s “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review” commentaries, both available at www.dbrs.com.

On 13 March 2023, DBRS Morningstar amended the above press release to correct the Initial Rating Date.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating European Covered Bonds” (March 2016). This can be found at http://www.dbrs.com/about/methodologies. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

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 documents have remained unchanged since the most recent rating action.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include historical default performance data and loan-by-loan level information on the cover pool provided by BCP that allowed DBRS to further assess the portfolio. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating actions on this transaction took place on 10 March 2016, when DBRS maintained the Under Review with Positive Implications status on the A (low) ratings of BCP OH, following a material update to the methodology DBRS uses to rate and monitor European covered bonds, and the completion of the annual review.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Keith Gorman
Initial Rating Date: 28 February 2012
Initial Rating Committee Chair: Claire Mezzanotte

Lead Analyst: Vito Natale, Senior Vice President
Rating Committee Chair: Diana Turner, Senior Vice President

DBRS Ratings Limited
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The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Global Methodology for Rating Banks and Banking Organisations
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model Methodology for European Securitisations
-- The Effect of Sovereign Risk on Securitisations in the Euro Area
-- Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings

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