TEXT-Fitch cuts Banco Popular Portugal covered bonds

(The following statement was released by the rating agency)

May 22 - Fitch Ratings has downgraded Banco Popular Portugal's (BPP; 'BBB-'/Negative/'F3') Obrigacoes Hipotecarias (OH, mortgage covered bonds) to 'BBB'/Rating Watch Negative (RWN) from 'A-'/RWN and has maintained them on RWN. The rating action is a result of the downgrade of Banco Popular Portugal's Issuer Default Rating (IDR) to 'BBB-' from 'BBB+' (RWN) (see "Fitch Downgrades Spain's Popular IDR to 'BBB'; Outlook Stable" published on 18 May 2012 on www.fitchratings.com). The covered bonds' rating on a Probability-of-Default (PD) basis is equalised with BPP's IDR at 'BBB-' due to the 100% Discontinuity Factor. As per Fitch's methodology, covered bonds may benefit from up to two-notch uplift for recoveries provided overcollateralisation (OC) is sufficient to maintain the rating. Previously, BPP's OH benefited from a 1-notch uplift for recoveries based on the Supporting Overcollateralisation (SOC) level of 47% and the bonds were rated at the higher rating level of 'A-'/RWN. BPP will publicly commit to a SOC level of 47% on their website. Such a SOC level is deemed sufficient to maintain a 1-notch uplift for recoveries, particularly given that the covered bonds are now rated at a lower rating level ('BBB-'/RWN) than previously. The RWN reflects the addition of commercial assets to the cover pool in December 2011 (see "Fitch Comments on Banco Popular Portugal Covered Bonds New Cover Pool Composition" published on 30 December 2011 at www.fitchratings.com) and the subsequent possible deterioration of the credit quality of the cover pool. Fitch is awaiting receipt of information from the issuer which will help form a more complete opinion on the credit quality of the cover pool. Should a complete information package not be delivered by the end of June, BPP covered bonds will likely be downgraded and the rating equalised to the issuer's IDR. The level of OC supporting a given rating will be affected, among other factors, by the profile of cover assets versus covered bonds, which is subject to change even in the absence of new issuances. It can therefore not be assumed that a given OC supporting the rating will remain stable over time. All else being equal, a downgrade of BPP's IDR will lead to an equivalent downgrade of their OH. (Caryn Trokie, New York Ratings Unit)