Nov 09 -
-- We have reviewed our credit assumptions in light of high default levels in the underlying
portfolio of Lusitano SME No. 1.
-- We have lowered our rating on Lusitano SME No. 1's class C notes and affirmed our ratings
on the class A and B notes.
-- Lusitano SME No. 1 is a cash securitization of loans granted by Banco Espirito Santo
to Portuguese SMEs.
Standard & Poor's Ratings Services today lowered its credit rating on Lusitano SME No. 1
PLC's class C notes. At the same time, we have affirmed our ratings on Lusitano SME No. 1's
class A and B notes (see list below).
Today's rating actions follow our review of the credit assumptions underlying our cash flow
analysis of the transaction. The primary reason for our review was an increase in cumulative
defaults, which now amount to 8.2% of the initial portfolio (or 24.4% of the outstanding
portfolio balance). This compares with 6.7% in May 2011 and 5.7% in November 2010, when we last
revised our assumptions for this transaction. Total delinquencies have remained fairly stable at
less than 5%, but we note that an increasing proportion of delinquencies are rolling into
longer-dated delinquencies and eventually into defaults.
At the same time, we note that recoveries on defaulted loans have been decreasing and taking
longer to realize, especially for the more recent defaults. We have revised our recovery rates
The weighted-average spread has increased to 4.5% from 3.5%, maintaining a reasonable level
of excess spread available to clear the principal deficiency ledgers (PDLs). For example, the
transaction repaid the class D PDL in full on the August payment date. However, we now observe
that the performing balance has decreased to such an extent that the excess spread is not
sufficient to fully replenish the reserve fund, which currently stands at 60% of its required
level. As a direct consequence, the transaction has been deferring interest payments on the
class D notes for the past six payment periods, as those payments rank junior in terms of
Since the end of its revolving period in October 2009, the transaction has been amortizing,
either on a pro rata basis when it met certain performance conditions, or on a sequential basis,
as is currently the case. Since July 2011, the class A notes have amortized from EUR370.4
million to EUR136.8 million or 18% of their initial balance, while the class B, C, and D notes
all currently stand at 87% of their initial notional amounts.
As a result, the credit enhancement available for each class of notes has increased,
although the junior tranches are now relatively more exposed to concentration risks in the
Our cash flow analysis indicates that the credit enhancement available to the class A notes
is commensurate with an 'A (sf)' rating. However, we note that the maximum achievable rating on
Portuguese structured finance transactions remains at 'A- (sf)', in accordance with our
nonsovereign ratings criteria (see "Nonsovereign Ratings That Exceed EMU Sovereign Ratings:
Methodology And Assumptions," published on June 14, 2011). Therefore we have affirmed our 'A-
(sf)' rating on the class A notes.
We have affirmed the rating on the class B notes at 'AAA (sf)', as these notes benefit from
an unconditional guarantee from the European Investment Fund (AAA/Stable/A-1+). Without this
guarantee, we would rate the class B notes lower than the class A notes.
We note that above a certain number of defaults, the transaction will hit its net cumulative
defaults trigger, which would lead to all proceeds being distributed to the senior notes,
cutting off interest proceeds to the class C notes. This feature kicks in earlier now that we
have adjusted our base-case default assumptions. In spite of an increased level of credit
enhancement, our revised cash flow analysis indicates that the class C notes can no longer
withstand a 'BB' stress. We have therefore lowered our rating on the class C notes to 'B (sf)'.
Banco Espirito Santo S.A. originated the loans to Portuguese small and midsize enterprises
(SMEs) that back Lusitano SME No. 1. The transaction closed in 2006.
RELATED CRITERIA AND RESEARCH
-- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012
-- European Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top
Five Macroeconomic Factors, March 14, 2012
-- Various Rating Actions Taken On 340 European Structured Finance Tranches After Eurozone
Sovereign Rating Actions, Jan. 23, 2012
-- Standard & Poor's Takes Various Rating Actions On 16 Eurozone Sovereign Governments, Jan.
-- 270 European Structured Finance Tranches Placed On CreditWatch Negative After Eurozone
Sovereign CreditWatch Placements, Dec. 9, 2011
-- Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five
Macroeconomic Factors, Nov. 4, 2011
-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June
-- Ratings Lowered On 68 Tranches In 48 Portuguese ABS And RMBS Transactions, April 1, 2011
-- Ratings On 1,979 EMEA Structured Finance Tranches Placed On CreditWatch Negative After
Counterparty Criteria Update, Jan. 18, 2011
-- Rating Lowered On Lusitano SME No. 1's Class C Portuguese ABS Notes Due To Portfolio
Defaults; Classes A And B Affirmed, Nov. 23, 2010
-- Rating On Lusitano SME No. 1's Class C Notes Placed On CreditWatch Negative, June 28,
-- Methodology And Assumptions: Update To The Criteria For Rating European SME
Securitizations, Jan. 6, 2009
Class To From
Lusitano SME No. 1 PLC
EUR871.233 Million Asset-Backed Floating-Rate Notes
C B (sf) BB- (sf)
A A- (sf)
B AAA (sf)