DBRS Ratings GmbH (DBRS Morningstar) upgraded to AA from AA (low) its ratings on the Obrigações Hipotecárias (OH; the Portuguese legislative Covered Bonds) issued under the Banco Santander Totta S.A. (Totta or the Issuer) EUR 12.5 billion OH programme (the Programme). The rating action follows the completion of a full review of the Programme.
The upgrade is driven by higher excess spread available in the transaction, resulting from higher stressed interest rates on the predominantly floating rate assets in the cover pool (CP), while the OH pay fixed rate, allowing the structure to withstand higher rating stresses.
There are ten series of OH outstanding under the Programme, totalling a nominal amount of EUR 8.60 billion.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of “A”, which is the Long-Term Issuer Rating of Totta. Totta is the Issuer of and Reference Entity for the Programme.
-- 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 LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (high).
-- A two-notch uplift for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 15%. 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.
-- The sovereign rating of the Republic of Portugal, rated BBB (high) with a Positive trend by DBRS Morningstar, as of the date of this press release.
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, interest rate stresses, and market value spreads to calculate liquidation values on the CP.
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 (low); (2) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (3) the relative amortisation profile of the OH and the CP moved adversely; or (4) volatility in the financial markets caused the currently estimated market value spreads to increase.
The aggregated outstanding balance of the CP backing the Issuer’s OH was EUR 10.01 billion as of 31 March 2022, while the total amount of liabilities outstanding is EUR 8.60 billion, yielding a current nominal OC ratio of 16.3%. The Issuer has publicly committed to maintaining an OC level of 15.0%.
As of 31 March 2022, the CP amounted to EUR 10.01 billion and was composed of 173,202 residential mortgage loans with an average loan amount of EUR 57,771. The CP has a weighted-average (WA) current unindexed loan-to-value ratio of 53.8%, a WA seasoning of 103 months, and a WA remaining time to maturity of 320 months. The CP is located mainly in Lisbon (36.7% by outstanding balance), Northern Portugal (31.5%), and Central Portugal (17.5%). All loans were originated for the purpose of acquiring first or second homes.
The vast majority of the loans in the CP (approximately 99%) are floating rate, indexed to different bases and reset at different times, while all OH series are fixed rate. The interest rate mismatch is mitigated by intra-group swap agreements; however, the swap documentation is not consistent with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology. As such, no credit was given to swaps in DBRS Morningstar’s analysis, and the 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 15 years based on a 0% prepayment rate, which is longer than the 4.4 years of WA life on the OH, not accounting for any maturity extension. This risk is mitigated by the extended maturity date, which falls one year after the maturity date, and by the OC in place.
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 “Average” according to its rating methodology. For more information, please refer to DBRS Morningstar’s publications, “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review,” both available at www.dbrsmorningstar.com.
For further information on the Programme, please refer to the rating report at www.dbrsmorningstar.com.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Rating and Monitoring Covered Bonds” (22 April 2022).
Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://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/381451/global-methodology-for-rating-sovereign-governments.
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.
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 2022, and static delinquencies (90 days+) by vintage of origination, spanning from 2003 to Q1 2016 and dynamic arrears data on the vintages 2000 to Q1 2022, 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 4 March 2022, when DBRS Morningstar assigned a AA (low) rating to Series 27 and discontinued its rating on Series 14.
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: https://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 Rodríguez-Vigil, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 27 February 2012
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
-- Rating and Monitoring Covered Bonds (22 April 2022), https://www.dbrsmorningstar.com/research/395642/rating-and-monitoring-covered-bonds.
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (22 April 2022), https://www.dbrsmorningstar.com/research/395643/rating-and-monitoring-covered-bonds-addendum-market-value-spreads.
-- Global Methodology for Rating Banks and Banking Organisations (23 June 2022), https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (8 July 2022) and European RMBS Credit Model v 18.104.22.168, https://www.dbrsmorningstar.com/research/399669/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021), https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Global Methodology for Rating Sovereign Governments (9 July 2021), https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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: https://www.dbrsmorningstar.com/research/278375.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.