DBRS Morningstar Confirms Caixa Económica Montepio Geral Covered Bonds (Obrigações Hipotecárias - Mortgages - CPT) at BBB (high)

DBRS Ratings GmbH (DBRS Morningstar) confirmed its BBB (high) ratings on the Obrigações Hipotecárias (OH; the Portuguese legislative Covered Bonds) issued under the Caixa Económica Montepio Geral (Banco Montepio or the Issuer) CPT Covered Bonds 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 2.30 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of B. Banco Montepio is the Issuer and Reference Entity for the Programme. Banco Montepio was not assigned a Long Term Critical Obligations Rating nor does DBRS Morningstar consider Portugal a jurisdiction in which covered bonds are a particularly important financing tool;
-- 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 (low);
-- A two-notch uplift for high recovery prospects; and
-- A committed minimum overcollateralisation (OC) of 18%. DBRS Morningstar gives full credit to such commitment in accordance with its principal methodology. Such level is not subject to a haircut as DBRS Morningstar considers it to be persistent based on historically observed levels.

DBRS Morningstar 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, and interest rate stresses.

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 OH ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded to 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.

The aggregated outstanding balance of the CP backing the Issuer’s OH was EUR 2.74 billion as at 31 March 2021, while the total amount of liabilities outstanding is EUR 2.30 billion, yielding a current nominal OC ratio of 19.2%. The Issuer has publicly committed to maintaining an OC level of 18.0%.

As at 31 March 2021, the CP assets comprised EUR 2.74 billion of residential mortgage loans (99.8% of the CP) and EUR 6.8 million of cash (0.2% of the CP). The mortgage CP has a weighted-average (WA) current unindexed loan-to-value ratio of 51.0%, a WA seasoning of 131 months, and a WA remaining time to maturity of 267 months. The CP is located mainly in Lisbon (36.2% by outstanding balance), Northern Portugal (27.6%), and Central Portugal (16.1%).

The vast majority of the loans in the CP (approximately 93%) are floating rate, while 46% of the OH Series is floating rate, indexed to three-month Euribor. The interest rate mismatch is mitigated by an external interest rate swap on Series 10. The remaining interest rate mismatch has been taken into account in DBRS Morningstar’s analysis.

The DBRS Morningstar-calculated WA life of the mortgage assets is roughly 12 years based on a 0% prepayment rate, which is longer than the 3.0 years of WA life on the OH, not accounting for any maturity extension. This risk is mitigated by the conditional pass-through (CPT) nature of the OH.

All CP assets and CB 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 publications, “DBRS Assigns LSF Assessment to Portuguese Covered Bonds ,” “Portuguese Covered Bonds: Legal and Structuring Framework Review ” and “DBRS Upgrades Caixa Económica Montepio Geral Covered Bonds to A (high) Upon Restructuring in CPT, Removes UR-D ,” which are available at www.dbrsmorningstar.com.

For further information on the Programme, please refer to the rating report at www.dbrsmorningstar.com.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many cover pools, some meaningfully. The ratings are based on additional analysis and, where appropriate, adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. In the cover pool analysis of this programme, DBRS Morningstar incorporated an increase in probability of default for certain borrower characteristics.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated residential mortgage-backed securities (RMBS) transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS
Corporate Governance is a significant rating factor for the Issuer and hence for the covered bonds. Over recent years, the Issuer has experienced high management turnover and reputational issues. Banco Montepio was also subject to several administrative proceedings and fines by the supervisory authorities in relation to alleged past failures in controls. Over the past year, however, the Issuer has made some progress in resolving some of these proceedings.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: Rating and Monitoring Covered Bonds (10 June 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

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.

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports and loan-by-loan data on the CP as at 31 March 2021, and static delinquencies (90 days+) by vintage of origination, spanning from 2002 to Q1 2021, 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 July 2020, when DBRS Morningstar downgraded the ratings to BBB (high) from “A” on the OH issued under the Programme.

The lead analyst responsibilities for this transaction have been transferred to Tomás Rodriguez-Vigil Junco.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Tomás Rodriguez-Vigil Junco, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 1 December 2011

DBRS Ratings GmbH, Sucursal en España
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Rating and Monitoring Covered Bonds (10 June 2021),
https://www.dbrsmorningstar.com/research/379983/rating-and-monitoring-covered-bonds.
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (10 June 2021)
https://www.dbrsmorningstar.com/research/379985/rating-and-monitoring-covered-bonds-addendum-market-value-spreads.
-- Global Methodology for Rating Banks and Banking Organisations (8 June 2020),
https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021),
https://www.dbrsmorningstar.com/research/376314/legal-criteria-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020),
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020),
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 January 2021) and European RMBS Credit Model v 1.0.0.0,
https://www.dbrsmorningstar.com/research/372339/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020),
https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020),
https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- Global Methodology for Rating Sovereign Governments (27 July 2020),
https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021),
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.