DBRS Ratings GmbH (DBRS Morningstar) assigned a rating of AA to the Series 28 (ISIN PTBSPAOM0008) 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 Series 28 is a EUR 750 million fixed-rate bond, paying a coupon of 3.375% and maturing on 19 April 2028.
Concurrently, DBRS Morningstar discontinued its rating on the Series 17 OH (ISIN PTBSRDOE0029) that matured on 17 April 2023.
The Programme has been converted to the updated Portuguese covered bonds (CB) law (the Legal Regime of Covered Bonds). The law transposes the European Union’s CB Directive, which outlines the harmonisation of CB frameworks across Europe, into Portuguese law. Following the conversion, DBRS Morningstar assigned a Legal and Structuring Framework (LSF) Assessment of “Strong” to the programme, instead of the “Average” LSF Assessment assigned previously.
Following the issuance of Series 28, there are ten series of OH outstanding under the programme, totalling a nominal amount of EUR 8.6 billion.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high). Totta is the Issuer of and Reference Entity for the programme. There is no Critical Obligations Rating (COR) associated with Totta, but DBRS Morningstar considers Portugal as a jurisdiction in which CBs are a particularly important financing tool. As such, the CBAP is set at the level of the Issuer Rating plus one notch.
-- An LSF Assessment of “Strong” 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 AA (low).
-- A one-notch uplift for good 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 on the Republic of Portugal, rated A (low) with a Stable 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 sovereign rating on the Republic of Portugal was downgraded to below A (low); (3) the LSF Assessment associated with the programme was downgraded; (4) the quality of the CP and the level of OC were no longer sufficient to support a one-notch uplift for good recovery prospects; (5) the relative amortisation profile of the OH and the CP moved adversely; or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.
The vast majority of the loans in the CP (approximately 99%) are floating rate, indexed to different bases, and they reset at different times, while all OH series are fixed rate. The resulting interest rate mismatch is mitigated by intra-group swap agreements that contain downgrade and collateral-posting language in line with DBRS Morningstar’s criteria and have been given full credit in DBRS Morningstar’s analysis.
The DBRS Morningstar-calculated weighted-average (WA) life of the mortgage assets is roughly 15.1 years based on a 0% prepayment rate, which is longer than the 4.1 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 “Strong” according to its rating methodology. For more information, please refer to DBRS Morningstar’s publication “Portuguese Covered Bonds: Legal and Structuring Framework Review”, 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); https://www.dbrsmorningstar.com/research/395642/rating-and-monitoring-covered-bonds.
Other methodologies referenced in this transaction are listed at the end of this press release.
In DBRS Morningstar’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS Morningstar focused on the cash flow analysis.
A review of the transaction legal documents was focused on the changes in the Programme’s documentation aimed at aligning the Programme with Legal Regime of Covered Bonds, on the amendments to the swap documentation finalised to aligning it with DBRS Morningstar’s Derivative Criteria for European Structured Finance Transactions (both executed in March 2023), and on the final terms of Series 28.
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 31 March 2022, 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 15 July 2022, when DBRS Morningstar upgraded to AA from AA (low) its ratings on the OH outstanding under the programme.
The lead analyst responsibilities for this transaction have been transferred to Antonio Laudani.
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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Antonio Laudani, 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.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (28 November 2022) and European RMBS Credit Model v 184.108.40.206, https://www.dbrsmorningstar.com/research/405779/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Global Methodology for Rating Sovereign Governments (29 August 2022), https://www.dbrsmorningstar.com/research/401817/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.