RPT-Fitch affirms Totta's mortgage covered bond programme at 'BBB'; outlook negative
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Oct 17 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Banco Santander Totta S.A.'s (Totta; BBB-/Negative/F3) Obrigacoes Hipotecarias (OH, Portuguese mortgage covered bonds) at 'BBB', Negative Outlook.
The affirmation follow a full review of the programme after applying the agency's updated covered bond master criteria and assumptions for assessing credit risk of Portuguese residential mortgage loans pools (see "Covered Bonds Rating Criteria" dated 4 September 2013 and "EMEA Criteria Addendum - Portugal" dated 30 July 2013 at www.fitchratings.com). In particular, Fitch has modelled recovery prospects for covered bonds subject to time subordination and to full discontinuity risk upon an issuer's event of default (see "Fitch Announces Enhancement to Recovery Uplift in Covered Bonds Ratings" dated 30 April 2013 at www.fitchratings.com).
In Fitch's view, Portuguese legislative programmes are subject to sequential allocation of recoveries given default, leaving later maturing covered bonds subordinated to the repayment of earlier bonds. Fitch assumes an ongoing allocation of funds from the cover pool to make the payments that become due under the covered bonds in chronological order of maturity. To assess the recovery prospects of the programmes, in line with its criteria, Fitch then compares the present value of the remaining cover assets' cash flows, incorporating stressed defaults and recoveries, discounted at the stressed interest rate curve plus one-half of the refinancing spread in the targeted scenario, with the present value of the remaining liabilities discounted at the stressed interest rate curve.
The agency has lowered its stressed refinancing spread assumptions used to calculate the net present value of future cash flows from Portuguese residential mortgages. The revised assumptions reflect the declining trend observed on spreads from secondary market Portuguese residential mortgage-backed securities and government bonds over the past three to five years but also takes into account the political instability and macroeconomic uncertainties surrounding the Portuguese economy.
KEY RATING DRIVERS
The 'BBB' rating is based on Totta's 'BBB-' Long-Term Issuer Default Rating (IDR), a Discontinuity Cap (D-Cap) of 0 and publicly committed over-collateralisation (OC) of 15%. The newly re-calculated break-even level of OC of 12% is sufficient to grant one-notch uplift for recoveries in excess of 51% on the bonds assumed to be in default in a 'BBB' rating scenario. The breakeven OC has increased from 5.26% to 12%, as the agency has modelled a sequential allocation of recovery proceeds due to the presence of time subordination and has applied its revised asset assumptions for the cover pool.
Fitch has maintained a D-Cap of 0 (full discontinuity) for Totta's mortgage covered bonds, which assumes an immediate default of the covered bonds following a default of the issuer. This overall risk assessment is driven by the liquidity gap and systemic risk component, which factors in the Portuguese sovereign IDR (BB+/Negative) being in the non-investment rating category, which in Fitch's view would prevent a successful timely cover pool refinancing in the event of an issuer default (see "Fitch Assigns Portuguese, Greek and Cypriot Covered Bonds Outlooks & D-Caps" dated 19 September 2012 at www.fitchratings.com). According to Fitch's covered bonds rating criteria, an uplift of up to two notches can be granted above the IDR based on recovery prospect, provided that the covered bond's rating on a probability of default basis is in the investment grade rating category.
A total of 94% of the cover assets and 83% of the covered bonds are floating rate. Totta has total return swaps in place on all outstanding series of covered bonds and an interest rate swap on one outstanding series of fixed rate bonds which amounts to EUR1bn. All swap agreements are entered with the parent bank, Banco Santander (BBB+/Negative/F2). Fitch gives full credit to the existing hedging structure.
As of 30 June 2013, the mortgage pool consisted of 165,344 loans originated by Totta with an outstanding balance of EUR8.2bn, whereas the outstanding covered bonds totalled EUR7.13bn. In a 'BBB' scenario, Fitch has calculated a credit loss of 9.4%, a cumulative weighted average (WA) foreclosure frequency of 23.1% and WA recovery rate of 59.5%.
Fitch calculates the WA current LTV of the mortgages at 56.7%. The cover pool weighted-average remaining term stands at 7.3 years, compared with 1.8 years for the covered bonds. All assets and liabilities are euro-denominated.
The Negative Outlook on the OH reflects that on Totta's IDR and for Portuguese residential mortgage loans (see '2013 Outlook: European Structured Finance', dated December 2012 at www.fitchratings.com).
The OH 'BBB' rating would be vulnerable to downgrade if any of the following occurred: (i) Totta's IDR was downgraded by one or more notches; or (ii) the programme OC went below the 12% breakeven OC calculated by Fitch.
Fitch's breakeven OC for the covered bond ratings will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time.
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