DBRS Ratings GmbH (DBRS Morningstar) confirmed its “A” ratings on the Obrigações Hipotecárias (the OH; the Portuguese legislative covered bonds) issued under the Novo Banco S.A. (Novo Banco or the Issuer) conditional pass-through (CPT) covered bond programme (the programme). The rating actions follow DBRS Morningstar’s full review of the programme.
There are seven series of OH outstanding under the programme, totalling a nominal amount of EUR 5.50 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 on Novo Banco. Novo Banco is the reference entity (RE) for the programme. While DBRS Morningstar does not consider the OH to be a systemically important financing tool in Portugal, it considers the assets in the programme to be strategic to the RE’s core activity.
-- 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.
-- The level of overcollateralisation (OC) to which DBRS Morningstar gives credit of 9.0%, which is the minimum level observed in the past 12 months, adjusted by a scaling factor of 0.9.
-- The sovereign rating of the Republic of Portugal, rated A (low) with a Stable trend by DBRS Morningstar, as of the date of this press release.
Everything else equal, a one-notch downgrade on the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade on the OH ratings. 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 2022, the aggregated outstanding balance of the CP underlying the Issuer’s OH was EUR 6.05 billion. The total amount of liabilities outstanding is EUR 5.50 billion, yielding a current nominal OC ratio of 10.0%.
The majority (99.97%) of the assets in the CP are prime residential mortgage loans while the balance is made up of a cash reserve. As at September 2022, the mortgage CP assets comprised 119,690 residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 51.1%, a WA seasoning of 102 months, and a WA remaining time to maturity of 299 months. The CP is located mainly in Lisbon (45.5% by outstanding balance), northern Portugal (26.2%), and central Portugal (16.7%).
Novo Banco’s OH do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (94% floating rate linked to different indexes and reset dates) and the interest paid to the OH holders (linked to three-month Euribor plus 25 basis points (bps) with quarterly resets). If the bond maturity is extended, the outstanding series become pass-through, paying one-month Euribor plus 25 bps on a monthly basis. The OC available mitigates this risk, which DBRS Morningstar accounted for in its cash flow analysis.
DBRS Morningstar calculated the WA life of the mortgage assets to be roughly 15 years based on a 0% prepayment rate, which exceeds the WA life on the OH of 3.7 years, not accounting for any maturity extension. The conditional pass-through nature of the OH mitigates this risk.
All CP assets and OH are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.
DBRS Morningstar 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” 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
Credit rating actions on Novo Banco, S.A. are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of Novo Banco, S.A. are discussed separately at https://www.dbrsmorningstar.com/issuers/20238.
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 (17 May 2022).
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.
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/401817/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 30 September 2022; static defaults (12 months+) by vintage of origination for 2002–20; and dynamic delinquencies (90 days+) from 2004 to August 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 11 July 2022, when DBRS Morningstar confirmed its “A” ratings on the OH issued under the programme.
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: 15 December 2015
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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),
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (22 April 2022),
-- Global Methodology for Rating Banks and Banking Organisations (23 June 2022),
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022),
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (7 October 2022) and European RMBS Credit Model v 18.104.22.168,
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022),
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022),
-- Global Methodology for Rating Sovereign Governments (29 August 2022),
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022),
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.