(Repeat for additional subscribers)
July 26 (The following statement was released by the rating agency)
Fitch Ratings has downgraded Banco Santander Totta's (Totta; BBB-/Negative/F3) outstanding Obrigacoes Hipotecarias (OH, mortgage covered bonds) to 'BBB' from 'BBB+'. The Outlook is Negative.
The downgrade follows a decrease in the overcollateralisation (OC) level publicly committed by the issuer to 15% from 30%.
KEY RATING DRIVERS
The OH 'BBB' rating is based on Totta's Long-term Issuer Default Rating (IDR), an unchanged Discontinuity Cap of 0 (full discontinuity risk) and a new publicly committed OC of 15%, which the agency takes into account in its analysis. The breakeven OC for the rating is 5.26%, which is the legal minimum OC level. This level of OC only allows a one-notch uplift to be granted for recoveries achieved in excess of 51%.
According to the Portuguese covered bonds legal framework, in the scenario of winding-up and liquidation of the issuer, the covered bond holders may opt for the cross-acceleration of the outstanding covered bonds, which must be approved by two-thirds of bond holders. Fitch assumes an immediate default of the covered bonds following a default of the issuer, which is reflected in the D-Cap of zero. In its recovery calculation, the agency has disregarded the risk of time subordination and considered the high likelihood of OH being accelerated upon an issuer's default, as 86% (over two-thirds) of the OH are retained by the issuer. The liability profile has changed since April 2013 due to the redemption of EUR1bn publicly placed covered bonds and issuance of EUR2.25bn retained covered bonds. Fitch has assumed pro-rata allocation of funds from the cover pool to make payments under the outstanding covered bonds, which has resulted in a lower level of break-even OC for the rating. However, should the composition of retained and publicly placed covered bonds change and the issuer loses its majority vote, Fitch will review the 'BBB' breakeven OC and rating of the programme.
The Negative Outlook on Totta's OH reflects the Negative Outlook on Totta's IDR and for Portuguese residential mortgage loans (see '2013 Outlook: European Structured Finance', dated December 2012 at www.fitchratings.com).
As of July 2013, Totta's outstanding OHs amounted to EUR7.13bn, secured by a total cover pool of EUR8.7bn, corresponding to a nominal OC of 22%. The cover pool consists mainly of prime residential mortgage loans originated by the issuer across Portugal. The cover assets residual weighted average maturity is 7.3 years, compared with 1.8 years for the OHs.
Totta's covered bonds benefit from an interest swap on one series of bonds with Banco Santander (BBB+/Negative/F2).
The OH 'BBB' rating would be vulnerable to downgrade if any of the following occurred: (i) Totta's Long-term IDR was downgraded by two or more notches; or (ii) the proportion of retained bonds falls below two-thirds of total outstanding liabilities.
Fitch's breakeven OC for the covered bond rating 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.