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Fitch Takes Action on Four Portuguese Covered Bonds Programmes
November 24, 2017 / 5:18 PM / 18 days ago

Fitch Takes Action on Four Portuguese Covered Bonds Programmes

(The following statement was released by the rating agency) LONDON/MILAN, November 24 (Fitch) Fitch Ratings has taken action on four Portuguese mortgage covered bonds (Obrigacoes Hipotecarias, OH) programmes issued by Banco Comercial Portugues, S.A. (BCP, BB-/Stable/B), Caixa Geral de Depositos, S.A. (CGD; BB-/Stable/B), Caixa Economica Montepio Geral (Montepio, B/Stable/B) and Banco Santander Totta SA (Totta, BBB/Positive/F2), as follows: - BCP's OH affirmed at 'BBB+'; Stable Outlook - CGD's OH affirmed at 'BBB+'; Stable Outlook - Montepio's OH upgraded to 'A+' from 'A'; Stable Outlook - Totta's OH affirmed at 'A'; Outlook revised to Positive from Stable The rating actions follow the periodic review of the programmes, as well as the implementation of the agency's European RMBS Rating Criteria (see "Fitch Publishes European RMBS Rating Criteria" dated 27 October 2017 at www.fitchratings.com). KEY RATING DRIVERS European RMBS Rating Criteria Implementation Stressed credit losses modelled for the Portuguese cover pools have decreased significantly, due to the application of Fitch's European RMBS Rating Criteria. This mirrors the changes in key country-specific assumptions, such as the reduction in the representative pool weighted average (WA) foreclosure frequency (FF), the 35% foreclosed sale adjustment (from 40%) and the 100% credit given to house price increases since loan origination (from 50%). Also, the agency has reduced the underwriting hits previously used in the asset analysis of the programmes. Overall, this explains the reduction in Fitch's breakeven overcollateralisation (OC) for the assigned ratings. The buffer between the revised breakeven OC for the rating and the OC relied upon by Fitch in its analysis is the main driver of the change of Outlook on the rating of Totta's OH; this is now in line with the Positive Outlook on the bank's Long-Term Issuer Default Rating (IDR). In addition, the rating action for Montepio's OH is driven by newly delivered line-by-line borrower income information, provided for 92% of the cover pool. Fitch is now assigning a lower WAFF to the cover pool based on the actual debt-to-income (DTI) distribution, rather than a flat DTI Class 5 for other cover pools where this information is missing (BCP and CGD). Issuer Default Rating (IDR) Uplift The unchanged IDR uplifts for Portuguese covered bonds mirrors their low risk of under-collateralisation in an issuer resolution scenario. Furthermore, for the covered bonds of BCP, CGD and Montepio, the two-notch IDR uplift considers that these banks' Long-Term IDRs are driven by their Viability Ratings. Totta's IDR benefits from support provided by its parent, Banco Santander S.A. (A-/Stable/F2), which is located in a different jurisdiction than the issuer; this drives the one-notch IDR uplift assigned to Totta's OH programme. Payment Continuity Uplift (PCU) The PCU for the OH of BCP, CGD and Totta continues to be zero notches, mirroring the inefficient protection for timely interest payments on covered bonds in the event of an issuer default. The unchanged six-notch PCU for Montepio's OH - rather than the standard eight notches applicable for conditional pass-through (CPT) programmes - considers the timeframe needed to access the liquidity reserve in case of an enforcement of the recourse to the cover pool. As per the programme documents, this reserve is made available only after the five-business day grace period has elapsed upon an issuer event, or if triggered by a missed payment of interest. The reserve is held by Elavon Financial Services Limited (AA/Stable/F1+). Recovery Uplift Fitch maintains the maximum recovery uplift for Portuguese OH; the relied upon OC compensates for credit losses modelled in a stress scenario, corresponding to covered bonds ratings. This results in a three-notch recovery uplift for the OH in case their tested rating on a probability of default (PD) basis is non-investment grade (for BCP and CGD) and a two-notch if investment grade (for Montepio and Totta). BCP OH The mortgage covered bonds of BCP are rated 'BBB+'/Stable, five notches above the bank's Long-Term IDR of 'BB-'. This is based on an unchanged IDR uplift of two notches, an unchanged PCU of zero notches and an unchanged recovery uplift of three notches. The 14% committed OC, which Fitch relies upon in its analysis, provides more protection than the revised breakeven OC of 7.0% (from 13.5%) for a 'BBB+' rating. The Stable Outlook on the OH rating reflects that on the bank's Long-Term IDR. The breakeven OC for the rating corresponds to a 'BB+' tested rating on a probability of default (PD) basis and a three-notch recovery uplift and reflects the reduced 6.8% 'BBB+' credit loss (from 13.7%), resulting from the implementation of our European RMBS Rating Criteria. The 'BBB+' WAFF for the cover pool is 26.9% and the 'BBB+' WARR is 76.3%. CGD OH The mortgage covered bonds of CGD are rated 'BBB+'/Stable, five notches above the bank's Long-Term IDR of 'BB-'. This is based on an unchanged IDR uplift of two notches, an unchanged PCU of zero notches and an unchanged recovery uplift of three notches. The 28% committed OC, which Fitch relies upon in its analysis, provides more protection than the revised breakeven OC of 6.0% (from 12.5%) for a 'BBB+' rating. The Stable Outlook on the OH rating reflects that on the bank's Long-Term IDR. The breakeven OC for the rating corresponds to a 'BB+' tested rating on a PD basis and a three-notch recovery uplift and reflects the reduced 5.8% 'BBB+' credit loss (from 12.5%), resulting from the implementation of our European RMBS Rating Criteria . The 'BBB+' WAFF for the cover pool is 25.7% and the 'BBB+' WARR is 78.8%. Fitch considers the programme as dormant, since CGD issued its last OH more than two years ago. Montepio OH The mortgage covered bonds of Montepio are rated 'A+'/Stable, 10 notches above the bank's Long-Term IDR of 'B'. This is based on an unchanged IDR uplift of two notches, an unchanged PCU of six notches and a recovery uplift of two notches. The contractual OC of 18%, which Fitch relies upon in its analysis, provides more protection than the breakeven OC of 14.5% for the 'A+' rating. The breakeven OC for the rating corresponds to an 'A-' tested rating on a PD basis and a two-notch recovery uplift. The Stable Outlook on the OH rating reflects that on the bank's Long-Term IDR. The programme is now rated at its maximum achievable rating of 'A+', which is also equal to Fitch's Country Ceiling for Portugal. The asset disposal loss and the credit loss components are the major drivers of the 'A+' breakeven OC (5.6% and 5.3%, respectively). In CPT programmes such as that of Montepio, an asset disposal loss component above zero represents the OC so that principal and interest revenues on assets can cover interest payments on covered bonds without triggering an asset sale. The reduced 5.3% credit loss component (from 7.9%), mirrors the updated asset analysis, which resulted in an 'A+' WAFF of 25.7% and an 'A+' WARR of 72.4%; this drives the upgrade of the programme. The 3.6% cash flow valuation component mainly represents the commingling loss Fitch assumes in the aftermath of an issuer insolvency and until the contractual remedial actions are implemented. It also considers the limited interest rate mismatches between mainly floating assets (94%) and 100% floating liabilities. The agency is not modelling the asset swap currently in place, which matures shortly, whereas it gives credit to the fixed to floating swap entered on the only outstanding fixed rate series (Series 10). The swap counterparty is The Royal Bank of Scotland PLC (BBB+/Stable/F2). Totta OH The mortgage covered bonds of Totta are rated 'A'/Positive, three notches above the bank's Long-Term IDR of 'BBB'. This is based on an unchanged IDR uplift of one notch, an unchanged PCU of zero notches and an unchanged recovery uplift of two notches. The 15% committed OC, which Fitch relies upon in its analysis, provides more protection than the revised breakeven OC of 6.0% (from 14.0%) for an 'A' rating. The Positive Outlook on the OH rating reflects that on Totta's Long-Term IDR and the fact the relied upon OC would be sufficient to compensate the credit losses under higher rating scenarios. The breakeven OC corresponds to a 'BBB+' tested rating on a PD basis and a two-notch recovery uplift and reflects the reduced 6.0% 'A' credit loss (from 14.2%), resulting from the implementation of our European RMBS Rating Criteria. The 'A' WAFF for the cover pool is 19.7% and the 'A' WARR is 71.3%. RATING SENSITIVITIES Banco Comercial Portugues, S.A. (BCP) Obrigacoes Hipotecarias (OH) All else being equal, the 'BBB+' rating of BCP's OH is vulnerable to a downgrade if any of the following occurs: (i) the Long-Term Issuer Default Rating (IDR) of BCP is downgraded to 'B+' or below; or (ii) the relied-upon overcollateralisation (OC), which is disclosed in the investor report, decreases below Fitch's 'BBB+' breakeven OC of 7.0%. Caixa Geral de Depositos, S.A. (CGD) OH All else being equal, the 'BBB+' rating of CGD's OH is vulnerable to a downgrade if any of the following occurs: (i) the Long-Term IDR of CGD is downgraded to 'B+' or below; or (ii) the relied-upon OC, which is disclosed in the investor report, decreases below Fitch's 'BBB+' breakeven OC of 6.0%. Caixa Economica Montepio Geral (Montepio) OH All else being equal, the 'A+' rating of Montepio's OH is vulnerable to a downgrade if any of the following occurs: (i) the Long-Term IDR of Montepio is downgraded to 'B-' or below; or (ii) the contractual OC decreases below Fitch's 'A+' breakeven OC of 14.5%. Banco Santander Totta SA (Totta) OH Changes in Totta's IDR could affect the rating of Totta's covered bonds. In particular, and all else being equal, a one-notch upgrade in Totta's IDR will lead to a one-notch upgrade on the covered bonds programme, as long as the relied-upon OC of the programme is enough to compensate for stresses commensurate with a 'A+' rating. All else being equal, the 'A' rating of Totta's OH is vulnerable to a downgrade if the relied-upon OC, which is disclosed in the investor report, decreases below Fitch's 'A' breakeven OC of 6.0%. Fitch's breakeven OC for a given covered bonds rating will be affected by, among other factors, the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore, the breakeven OC for a covered bonds rating cannot be assumed to remain stable over time. Contact: Primary Analysts Roberto Del Ragno (BCP and Montepio) Director +39 02 879 087 206 Fitch Italia S.p.A. Via Morigi 6, 20123 Milan Alessandro Bosello (CGD and Totta) Analyst +39 02 879 087 278 Fitch Italia S.p.A. Via Morigi 6, 20123 Milan Secondary Analysts Alessandro Bosello (BCP and Montepio) Analyst +39 02 879 087 278 Roberto Del Ragno (CGD and Totta) Director +39 02 879 087 206 Committee Chairperson Helene Heberlein Managing Director +33 1 44 29 91 40 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Covered Bonds Rating Criteria (pub. 30 Oct 2017) here European RMBS Rating Criteria (pub. 27 Oct 2017) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel File (pub. 30 Oct 2017) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 Feb 2017) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) here Structured Finance and Covered Bonds Country Risk Rating Criteria (pub. 18 Sep 2017) here Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 17 Feb 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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