OREANDA-NEWS. March 16, 2015. Fitch Ratings has assigned Sagres STC, S.A. / Pelican SME No.2 (Pelican SME 2) notes final ratings, as follows:

Class A notes EUR545.9m: 'A+sf'; Outlook Positive
Class B notes EUR76.4m: 'Asf'; Outlook Stable
Class C notes EUR87.3m: 'BBBsf'; Outlook Stable
Class D notes EUR398.5m: not rated
Class S notes EUR16.2m: not rated

Pelican SME 2 is a cash flow securitisation of a EUR1,092m revolving pool of term loans and credit lines granted to Portuguese small- and medium-sized enterprises (SMEs), originated and serviced by Caixa Economica Montepio Geral (Montepio, BB/Negative/B).

KEY RATING DRIVERS
Positive Portfolio Selection
Fitch has assigned Montepio's SME book an expected average probability of default of 8.4% and an expected cure rate on defaulted loans of 40%. The pool has been positively selected in that borrowers with the lowest internal ratings have been excluded. This results in a portfolio lifetime cured default rate of 27.1% and a portfolio lifetime recovery rate of 32.8%, under a 'B' scenario. In a 'A' stress scenario, Fitch has assumed a portfolio lifetime cured default rate of 48.6% and a portfolio lifetime recovery rate of 18.4%.

Stressed Portfolio Credit Quality
The transaction has a two-year replenishment period during which available principal proceeds may be used to purchase additional SME loans and credit lines that meet specific portfolio covenants. After the replenishment period, further advances on existing credit lines may still be purchased during an additional offering period of one year. The breach of a dynamic arrears trigger of 4%, among others, will end the replenishment and offering periods. Fitch has captured a stressed portfolio based on eligibility criteria and revolving portfolio covenants.

Credit Line Exposure
Up to 20% of the securitised portfolio may comprise drawn credit line amounts. Fitch believes that credit lines have higher refinancing risk than term loans, given their bullet nature and the reliance of SMEs on credit facilities to operate their business. Fitch has captured such risk by extending the term of credit lines. However, if the originator defaults the issuer would not be liable to meet further advances claims under the credit lines, since only rights but no obligations can be transferred to the issuer, as per the Portuguese securitisation law.

Limited Excess Spread Trapping
Excess spread is provided by a minimum portfolio weighted average (WA) margin of 4%, as per the portfolio covenants, which compares with a WA margin of the rated notes of 1.43% at closing. However, excess spread will not be available to provision for defaults until defaulted receivables reach 24 months in arrears or recoveries begin flowing in, according to the transaction's provisioning mechanism.

Limited Recoveries
According to the revolving portfolio covenants, a minimum of 20% must be secured by a first lien mortgage with a maximum loan to value of 100%. However, up to 80% of the portfolio may comprise unsecured credit rights, which may have pledges on assets and personal guarantees but no mortgage rights. The mainly unsecured nature of the portfolio limits potential recoveries on defaulted credit rights.

Dedicated Cash Reserve
The transaction is exposed to servicer disruption risk, which is mitigated by a EUR16.38m non-amortising cash reserve, which is dedicated to cover senior costs and class A interest shortfalls, as long as class A notes are outstanding. The size of the cash reserve is considered sufficient to cover for at least three months of class A interest payments, even in a high interest rate scenario. As per the transaction documents, classes B and C are not exposed to payment interruption risk, since interest payments on classes B and C are deferrable.

Reasonable Investigation
Fitch has been provided with a loan-by-loan data template of the securitisation pool. An external audit report confirmed that the data provided to Fitch conforms to Montepio's loan system data, but did not seek to verify the accuracy of such data. However, Fitch relied on the file review we undertook and on the bank's internal audit procedures, which verified that the loan agreements are properly executed, on a regular basis. Credit processes and procedures are also subject to regular inspections by the Bank of Portugal and external auditors.

TRANSACTION SUMMARY
The class A notes' rating addresses the timely payment of interest on the class A notes, according to the terms and conditions of the documentation, as well as the repayment of principal by final maturity date. The class B and C notes' ratings address payment of interest and principal on the notes by final maturity date, as per the terms and conditions of the documentation.

The rated notes benefit from significant credit enhancement, provided by the subordination of the class D notes. The proceeds from the class S notes will fund a set-off reserve account. The structure is unhedged but subject to limited interest rate risk, since both assets and liabilities pay a variable coupon linked to Euribor.

RATING SENSITIVITIES
A 25% increase in the obligor default probability would lead to a downgrade of up to three notches for the rated notes. A 25% reduction in expected recovery rates would lead to a downgrade of up to one notch for the rated notes. A combined 25% increased default probability and a 25% decrease on expected recoveries would lead to a downgrade of up to four notches of the rated notes.

Key Rating Drivers and Rating Sensitivities are further described in the accompanying new issue report, which will shortly be available at www.fitchratings.com.