Fitch Upgrades 1 Portuguese Mortgage Covered Bonds Programme; Affirms 3
The rating actions follow the annual review of all the programmes.
KEY RATING DRIVERS
The asset disposal loss remains the greatest contributor to the BE OC for all the programmes, except for Totta's which has more limited maturity mismatches than the others. The rating of the OH is based on recovery prospects and the asset disposal component represents a stressed valuation of the entire cover pool after an assumed covered bond default at the OH rating scenario. This is driven by the high refinancing spread assumed for Portuguese mortgage loans (500bp in 'B' rating scenario).
The tested rating on a probability of default (PD) basis is equalised with the IDR of the Portuguese banks as adjusted by the IDR uplift. The discontinuity cap (D-Cap) is 0 and Fitch does not test timely payments because the tested rating on PD is also the floor for the rating of the OH, regardless of the level of OC.
The credit loss has reduced for all the programmes. This takes into account no material changes in cover pool characteristics, deleveraging and incorporates updated asset assumptions. In case of CGD, the reduction also takes into account that Fitch no longer adjusts its quick sale adjustment (QSA) and recovery lag as the issuer has provided repossession data to back test agency assumptions. The credit loss reduction for the CGD programme to 6.9% from 8.2% at previous rating level drives the upgrade to 'BBB' from 'BBB-'. Fitch continues to use an increased QSA of 50% from 40% and a lengthened the recovery timing of six years from four years for BCP and Totta to account for the lack of recovery data from these issuers.
The cash flow valuation generally leads to lower BE OC levels driven by either hedged interest rate mismatches or limited open interest rate positions. In case of CGD, the cumulative excess spread in the structure (0.8%) offsets interest rate mismatches: 29% of the bonds are fixed versus 99% floating rate mortgage assets. The hedging in place for Montepio's and Totta's OH programme contributes to the negative cash flow valuation.
Montepio has an asset swap in place with Royal Bank of Scotland N.V. (The) (BBB+/Stable/F2) whereas Totta entered into total return swaps on all the series outstanding with the parent bank Banco Santander S.A.(A-/Stable/F2).
In its analysis, Fitch has given credit to the level of OC that each of the issuers commits to in their latest investor reports (June 2015 for BCP and September 2015 for CGD, Montepio and Totta).
KEY RATING DRIVERS - BCP
The 'BBB-' rating is based on BCP's Long-term IDR of 'BB-', an unchanged IDR uplift of 1, an unchanged Discontinuity Cap (D-Cap) of 0 (full discontinuity risk) and the 26% OC that Fitch takes into account in its analysis, which provides more protection than the 14% 'BBB-' BE OC (down from 23% previously).
The change in the BE OC is due to the better maturity mismatches, which resulted from the longer weighted average (WA) life of the OH of 3.0 years from 2.6 following the reschedule of the maturity date of the EUR2bn Series 8 to October 2020 from October 2015. The WA life of the assets remains 14 years.
The 14% 'BBB-' BE OC considers a two-notch uplift based on recoveries given default of at least 71%. BCP's credit loss is 10.1% and it reflects the 'BBB-' WA frequency of foreclosure (FF) of 27.4% and a WA recovery rate (RR) of 66.5%.
KEY RATING DRIVERS - CGD
The 'BBB' rating is based on CGD's Long-term IDR of 'BB-', an unchanged IDR uplift of 1, an unchanged D-Cap of 0 (full discontinuity risk) and the 38.5% OC that Fitch takes into account in its analysis, which provides more protection than the 35% 'BBB' BE OC (up from 18.5% at the previous 'BBB-' rating).
The 38.5 committed OC is sufficient for a three-notch uplift from the tested rating on PD which is commensurate with at least 91% recoveries given default. The cover pool credit loss of 7.8% reflects the 'BBB' WAFF of 26.7% and a WARR of 72.8%.
KEY RATING DRIVERS - Montepio
The 'BB+' rating is based on Montepio's Long-term IDR of 'B+', an unchanged IDR uplift of 0, an unchanged D-Cap of 0 (full discontinuity risk) and the 35% OC that Fitch takes into account in its analysis, which provides more protection than the 14.5% 'BB+' BE OC down from 17%. The change in the BE OC is mostly due to the full scheduled repayment of the EUR500m Series 3 in November 2015.
The 14.5% 'BB+' breakeven OC considers three notches for at least 91% recoveries given default. The cover pool credit loss of 5.1% reflects the 'BBB-' WAFF of 20.8.% and a WARR of 76.6%.
KEY RATING DRIVERS - Totta
The 'BBB+' rating is based on Totta's Long-term IDR of 'BBB', an unchanged IDR uplift of 0, an unchanged Discontinuity Cap (D-Cap) of 0 (full discontinuity risk) and the 15.0% OC that Fitch takes into account in its analysis, which provides more protection than the 7% 'BBB+' BE OC, down from 10.5%.
The change in the BE OC is driven by a better maturity mismatch between assets and liabilities: the WA life of the liabilities has increased to 2.5 from 2.3 years after the EUR1.5bn issuances (Series 14 and Series 15) in 2015. The WA life of the assets remains 7.2 years. It is also driven by the cumulative excess spread now available in the structure (4.4%) following the cancellation of EUR750m covered bonds in October 2015, which were paying a higher margin than the newly issued bonds.
The 15% committed OC allows the OH to achieve at least 51% recoveries given default, which is commensurate with a one-notch rating uplift from the tested rating on PD. The cover pool credit loss of 10.9% reflects the 'BBB-' WAFF of 24.1% and a WARR of 59.3%.
RATING SENSITIVITIES - Banco Comercial Portugues S.A. (BCP)
The 'BBB-' rating would be vulnerable to downgrade if any of the following occurs: (i) BCP's Issuer Default Rating (IDR) is downgraded by one or more notches to 'B+' or below; (ii) the number of notches represented by the IDR uplift and Discontinuity Cap (D-Cap) is reduced to zero; or (iii) the overcollateralisation (OC) that Fitch considers in its analysis decreases below Fitch's 'BBB-' breakeven (BE) level of 14%.
RATING SENSITIVITIES - Caixa Geral de Depositos, S.A. (CGD)
The 'BBB' rating would be vulnerable to downgrade if any of the following occurs: (i) CGD's IDR is downgraded by one or more notches to 'B+' or below; or (ii) the number of notches represented by the IDR uplift and D-Cap is reduced to zero; or (iii) the OC that Fitch considers in its analysis decreases below Fitch's 'BBB-' BE level of 35%.
RATING SENSITIVITIES - Caixa Economica Montepio Geral (Montepio)
The 'BB+' rating would be vulnerable to downgrade if any of the following occurs: (i) Montepio's IDR is downgraded by one or more notches to 'B' or below; or (ii) the OC that Fitch considers in its analysis decreases below Fitch's 'BB+' BE level of 14.5%.
RATING SENSITIVITIES - Banco Santander Totta SA (Totta)
The 'BBB+' rating would be upgraded if Totta's IDR is upgraded by one or more notches to 'BBB+' or above.
At the same time, all else being equal, The 'BBB+' rating would be vulnerable to downgrade if the OC that Fitch considers in its analysis decreases below Fitch's 'BBB+' BE level of 7%.
The Fitch BE OC for the covered bond ratings will be affected, amongst others, by 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 BE OC to maintain the covered bond ratings cannot be assumed to remain stable over time.
The rating actions are as follows:
BCP
OH affirmed at 'BBB-'/Stable with a BE OC of 14%
BE OC components: -5.3% cash flow valuation, 10.1% credit loss, 16.4% asset disposal loss
CGD
OH upgraded to 'BBB'/Stable with a BE OC of 35%
BE OC components: 0.3% cash flow valuation, 7.8% credit loss, 40.2% asset disposal loss
Montepio
OH affirmed at 'BB+'/Stable with a BE OC of 14.5%
BE OC components: -6.7% cash flow valuation, 5.1% credit loss, 20.2% asset disposal loss
Totta
OH affirmed at 'BBB+'/Positive with a BE OC of 7%
BE OC components: -2.0% cash flow valuation, 10.9% credit loss, 4.2% asset disposal loss
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