DBRS Ratings Limited (DBRS) upgraded the ratings of the Obrigações Hipotecárias (OH; the Portuguese legislative covered bonds) issued under Caixa Geral de Depósitos, S.A.’s (CGD or the Issuer) covered bond programme (the Programme) to AA (low) from A (high).
The rating action reflects the upgrade of the Issuer Critical Obligations Rating (COR) to A (low) from BBB (high) on 3 June 2019. CGD’s COR is the Covered Bond Attachment Point (CBAP) of the Programme.
At the same time, DBRS discontinued its rating on Series 16, which matured on 15 January 2019.
As of today, the total amount of bonds outstanding under the Programme was EUR 5.25 billion spread across five series, EUR 3.0 billion of which is retained.
The ratings are based on the following analytical considerations:
-- A CBAP of A (low), which is the Long-Term COR of CGD. CGD is the Issuer and the Reference Entity (RE) for the Programme. DBRS does not consider OH a systemically important financing tool in Portugal; however, DBRS considers the assets in the Programme to be strategic to the core activity of the RE.
-- A Legal and Structuring Framework (LSF) Assessment of “Average” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), which is the lowest CPCA in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of “A”.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 28% to which DBRS gives credit, which is the level of OC the Issuer commits to maintain as stated in the quarterly Investor Reports. Such level is not subject to haircut, as DBRS has observed that it has been persistent for the past 24 months.
The transaction was analysed with DBRS’s European Covered Bond Cash Flow Tool. The main assumptions focused on the timing of defaults, recoveries of the assets and interest rate stresses as well as market value spreads to calculate liquidation values on the cover pool (CP).
Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the covered bonds rating by one notch. In addition, the ratings of the OH would be downgraded if any of the following occurred: (1) the sovereign rating of the Republic of Portugal was downgraded below BBB (low); (2) the CPCA were downgraded below BBB (low), (3) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects, (4) the relative amortisation profile of OH and CP moved adversely, (5) the LSF Assessment associated with the Programme was downgraded or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.
As of March 2019, the total CP balance was EUR 7.41 billion, including EUR 7.28 billion of mortgages and EUR 123.16 million of eligible securities and cash. As of today, there were EUR 5.25 billion of covered bonds outstanding under CGD OH, giving an estimated total OC of 41%.
As of March 2019, the mortgage CP comprised 185,458 residential mortgages granted to individuals with an average loan amount of EUR 39,276. The weighted-average unindexed loan-to-value of the mortgages was 47.071% with a seasoning of 154 months. The CP was mainly distributed between Lisbon (34.02% by outstanding balance); Northern Portugal (26.48%); and Central Portugal (22.11%).
Of the loans in the CP, 99.9% pay a floating interest rate indexed to Euribor, while 38.1% of the covered bonds are fixed rate. No swaps are in place to mitigate such a mismatch, and this has been accounted for in DBRS’s analysis.
All CP assets are denominated in euros, as are the OH. As such, investors are not currently exposed to any foreign exchange risk.
As of today, the weighted-average life of the CP was 10.5 years based on a 0% prepayment rate, which is longer than the 4.4 years weighted-average life on the OH when considering the expected maturity. This risk is partly mitigated by the OC available and partly by a 12-month extendable maturity feature by which, should the Issuer default on its payment on the covered bonds at the respective expected maturity date, the covered bond maturities are automatically extended on a monthly basis up to 12 months.
DBRS has assessed the LSF related to CGD OH as “Average” according to its rating methodology. For more information, please refer to the DBRS commentaries “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review,” both available at www.dbrs.com.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is: “Rating European Covered Bonds.”
In DBRS opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the cash flow analysis.
A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.
Other methodologies and criteria referenced in this transaction are listed at the end of this press release. These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.
The sources of data and information used for these ratings include dynamic performance data, stratification tables and loan-by-loan-level information on the CP provided by the Issuer that allowed DBRS to further assess the portfolio.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on 11 January 2019, when DBRS confirmed the A (high) ratings of CGH OH following the completion of a full review of the Programme.
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
For further information on DBRS historical default rates published by the European Securities and Markets Authority (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 and US regulations only.
Lead Analyst: Alessandra Maggiora, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 10 September 2012
DBRS Ratings Limited
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The rating methodologies 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
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal 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
-- Interest Rate Stresses for European Structured Finance Transactions
-- Rating Sovereign Governments
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.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at email@example.com.