DBRS Ratings Limited (DBRS Morningstar) confirmed its “A” ratings on the Obrigações Hipotecárias (OH; the Portuguese legislative covered bonds) issued under the Novo Banco S.A. (Novo Banco or the Issuer) Conditional Pass-Through Covered Bond programme (the Programme). The confirmation follows the completion of a full review of the Programme.
There are five series of OH outstanding under the Programme totalling a nominal amount of EUR 4.20 billion.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BB (high), which is the Long-Term Critical Obligations Rating of Novo Banco. Novo Banco is the Reference Entity (RE) for the Programme. DBRS Morningstar does not consider OH to be a systemically important financing tool in Portugal; however, DBRS Morningstar considers the assets in the Programme strategic to the core activity of the RE.
-- A Legal and Structuring Framework (LSF) Assessment of Adequate associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (high), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of BBB (high).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 9.0% to which DBRS Morningstar gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.9.
The transaction was analysed with the DBRS Morningstar European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets and interest rate stresses.
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 (CB) rating by one notch.
In addition, all else unchanged, the OH ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below BBB (high); (2) the LSF Assessment associated with the Programme was downgraded; or (3) the quality of the cover pool (CP) and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.
As of 30 September 2019, the aggregated outstanding balance of the CP underlying the Issuer’s OH was EUR 4.62 billion. The total amount of liabilities outstanding is EUR 4.20 billion, yielding a current nominal OC ratio of 10.0%.
The vast majority (99.96%) of the loans in the CP are prime residential mortgage loans, the rest being the cash reserve. As at September 2019, the mortgage CP assets comprised 99,299 residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 54.8%, a WA seasoning of 109 months and a WA remaining time to maturity of 290 months. The CP is located mainly in Lisbon (42.3% by outstanding balance), Northern Portugal (26.9%) and Central Portugal (19.0%).
Novo Banco’s OH do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (90% floating rate linked to different indexes and reset dates) and the interest paid to the CB holders, linked to three-month Euribor plus 25 basis points with quarterly resets. If the maturity of the bonds is extended, the outstanding series become pass-through paying one-month Euribor plus 25 basis points on a monthly basis. This risk is mitigated by the OC available and has been accounted for in DBRS Morningstar’s cash flow analysis.
The DBRS Morningstar-calculated WA life of the mortgage assets is roughly 14 years based on a 0% prepayment rate, which is longer than the 2.8 years of WA life on the OH, not accounting for any maturity extension. This risk is mitigated by the conditional pass-through nature of the OH.
All CP assets and OH are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.
DBRS Morningstar has assessed the LSF related to the Programme as “Adequate” according to its rating methodology. For more information, please refer to DBRS Morningstar’s commentaries “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review,” both available at www.dbrs.com.
For further information on the Programme, please refer to the rating report at www.dbrs.com.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Rating and Monitoring Covered Bonds”.
DBRS Morningstar 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.
Other methodologies 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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for these ratings include investor reports, loan-by-loan data on the CP and historical default performance data provided by the Issuer.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS Morningstar 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 16 September 2019, when DBRS Morningstar confirmed its “A” ratings of the outstanding OH issued under the Programme.
Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
For further information on DBRS Morningstar 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: Roger Bickert, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 15 December 2015
DBRS Ratings Limited
20 Fenchurch Street
Registered and incorporated under the laws of England and Wales: Company No. 7139960
The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- Rating and Monitoring Covered Bonds
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses 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
-- Global Methodology for Rating Sovereign Governments
A description of how DBRS Morningstar 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.