Fitch Affirms Sagres STC S.A. / Pelican SME No.2 Ratings

OREANDA-NEWS. Fitch Ratings has affirmed Sagres STC, S.A. / Pelican SME No.2 (Pelican SME 2) notes, as follows:

EUR545.9m Class A notes: 'A+sf'; Outlook Stable
EUR76.4m Class B notes: 'Asf'; Outlook Stable
EUR87.3m Class C notes: 'BBBsf'; Outlook Stable
EUR398.5m Class D notes: not rated
EUR21.1m Class S notes: not rated

Pelican SME 2 is a cash flow securitisation of an 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, B+/Stable/B).

KEY RATING DRIVERS
Stable Performance; Positive Selection
We are maintaining an expected annual average probability of default on Montepio's SME loan book at 8.4% and an expected lifetime cure rate on defaulted loans at 40%, based on updated performance data as of end-2015. Delinquency rates on term loans and credit lines are fairly high, at about 20% and 40% respectively. However, high delinquencies are heavily concentrated in the construction and real estate sectors, while the transaction's revolving covenants limit exposure to these sectors to 26%. In addition, the securitisation portfolio is positively selected in that borrowers with the worst internal ratings are excluded at the time of purchase.

Stressed Portfolio Credit Quality
During the revolving period to March 2017 available principal proceeds may be used to purchase additional receivables that meet specific concentration limits. We have stressed the current portfolio to capture a potential deterioration of the portfolio composition within such limits. Our analysis assigns an expected lifetime loss rate of 12.5% to the stressed portfolio, based on expected cured default rates and recovery rates of 19.2% and 34.7% respectively. Such gross levels are aligned with our closing analysis. The breach of a dynamic arrears trigger of 4%, among others, would lead to an early amortisation of the portfolio. This trigger compares with a 1.7% dynamic arrears ratio on the portfolio as of end-December 2015.

Credit Line Exposure
Up to 20% of the securitised portfolio may comprise drawn credit line amounts. We believe 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. We have captured such risk by extending the term of credit lines by two years.

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 (LTV) 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 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. 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.

RATING SENSITIVITIES
A 25% increase in the obligor default probability would lead to a downgrade of two 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.

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.

Prior to the transaction closing, Fitch conducted a review of a small targeted sample of the originator's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.

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.
-Issuer and Servicer reports as of end-January 2016, provided by Citi.
-Monthly loan-by-loan data as of end-December 2015, stored in the European Data Warehouse.
-Bank SME loan book performance data as of end-2015, provided by Montepio.

REPRESENTATIONS AND WARRANTIES
A comparison of the transaction's Representations, Warranties & Enforcement Mechanisms to those typical for the asset class is available by accessing the appendix that accompanies the initial new issue report (see Sagres STC, S.A. / Pelican SME 2 - Appendix, dated 1 April 2015 at www.fitchratings.com). In addition refer to the special report "Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions" dated 12 June 2015 available on the Fitch website.

Contacts:
Lead Surveillance Analyst
Antonio Casado
Director
+34 91 702 57 76
Fitch Ratings Espana, SAU
Plaza Colon 2, Torre II
28046 Madrid

Committee Chairperson
Mattias Neugebauer
Managing Director
+44 203 530 1099

Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com.

Additional information is available at www.fitchratings.com.

Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Criteria for Rating Granular Corporate Balance-Sheet Securitisations (SME CLOs) (pub. 03 Mar 2016)
Criteria for Sovereign Risk in Developed Markets for Structured Finance and Covered Bonds (pub. 20 Feb 2015)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

Related Research
Sagres STC, S.A. / Pelican SME No. 2 - Appendix

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
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