OREANDA-NEWS. Fitch Ratings has affirmed Sagres STC S.A. Douro SME No.2's class A notes at 'A+sf', following the extension of the revolving period for another three years under the original terms of the transaction. The notes are on Positive Outlook, reflecting the Outlook on Portugal.

EUR1,819,400,000 Class A (ISIN: PTSSCMOM0000): affirmed at 'A+sf'; Outlook Positive

The transaction is a cash flow securitisation of term loans, credit lines and commercial paper facilities granted by Banco BPI, S.A. (BB/Stable/B) to small and medium-sized enterprises in Portugal.

This affirmation considers the modification to the transaction documents in December 2015. These changes are a three-year revolving period extension, the modification of several portfolio covenants with respect to concentration limits and interest rate types, the modification of the provisioning mechanism under which 100% of the provisioning will take place after 12 months in arrears and the introduction of a 15% limit on the principal that can be retained in the issuer account bank if eligible loans originated should prove insufficient.

The modified portfolio covenants allow increasing the maximum permitted borrower concentration; for example, the 70 largest borrowers could represent a maximum of 35% of the pool instead of 30%. In addition, some covenants with respect to the interest rate of the asset were modified including the minimum portion of loans whose reference index is three-month Euribor, which has been reduced to 30% from 55%, and the maximum threshold for assets that pay interest other than monthly or quarterly, which has been increased to 50% from 30%.

Although the two abovementioned covenants that refer interest rates were marginally breached in 3Q15. Fitch's analysis concluded that it did not have any material credit impact.

The rating addresses the timely payment of interest and the ultimate payment of principal on the class A notes, in accordance with the terms and conditions of the documentation.

KEY RATING DRIVERS

Sovereign Cap
The rating is the highest rating possible for Portuguese structured finance transactions, as it is six notches above the Republic of Portugal's Issuer Default Rating (BB+/Positive/B). Current credit enhancement would be sufficient to support an upgrade of the notes to the 'AAsf' category if the Country Ceiling is raised due to a Portuguese sovereign upgrade.

Better Asset Quality than Peers
BPI's observed default frequency of the SME and corporate segments loan book shows lower defaults than the average of its Portuguese peers. Fitch has assigned an average probability of default for each obligor of 4.5%, markedly lower than the country benchmark of 6.5%.

Low Delinquencies
The transaction's 90 days delinquencies plus written-off loans stand at 3.7% of the outstanding balance, compared with the 7% trigger for early amortisation. In addition, the principal deficiency ledger is zero at present because the transaction is currently generating sufficient excess spread to provision for defaults.

Fully Funded Reserve Fund
The reserve fund is fully funded after the ramp-up period at the required level of 5% of the class A notes balance (EUR 90.97m). The reserve fund can be used to reduce interest payment interruption risk on the class A notes. It can also be used to amortise the class A notes if the class A notes can be fully redeemed by releasing the reserve.

RATING SENSITIVITIES
Fitch believes the class A notes' rating is able to absorb large variations to our base case credit assumptions. This is because our credit assumptions would support a rating in the 'AAsf' category -although this rating is not achievable due to the cap at the Country Ceiling at 'A+'.

In testing the notes' sensitivities Fitch has found that an increase of defaults and a reduction of recoveries by 25% each has no impact on the class A notes' ratings.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.

Prior to the transaction closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

SOURCES OF INFORMATION
The information below was used in the analysis.
-Loan-by-loan data provided by BPI as of end-September 2015
Transaction reporting provided by BPI and Citibank as of end-September 2015