Nov 29 - Fitch Ratings has affirmed Caixa Geral de Depositos S.A.'s (CGD or
the issuer, 'BB+'/Negative/'B') Obrigacoes Hipotecarias (OH, mortgage covered
bonds) at 'BBB', Negative Outlook. The rating action follows a full review of
The rating is based on CGD's Long-term (LT) Issuer Default Rating (IDR) of
'BB+', the Discontinuity Cap (D-Cap) of 0 (full discontinuity) and the
over-collateralisation (OC) of 35% that Fitch takes into account in its
In terms of the sensitivity of the covered bonds' rating, the 'BBB' rating would
be vulnerable to downgrade if any of the following occurred: (i) the LT IDR was
downgraded by one or more notches; or (ii) the programme OC went below 35%,
which is the breakeven level in line with the 'BBB' rating. The Negative Outlook
on CGD's LT IDR drives the Negative Outlook on the covered bonds.
The agency takes into account CGD's publicly stated OC for the purpose of its
analysis because the issuer's Short-term (ST) IDR is below 'F2'. At 35%, the OC
stated in the OH's investor reporting is in line with a 'BBB' rating considering
recoveries given default. In its cash flow analysis, the agency has determined
stressed recoveries from the cover pool in a 'BBB' scenario, which were not
sufficient to ensure 100% recovery rates on all outstanding covered bonds.
Nonetheless, Fitch has also tested recovery prospects on the longer dated bonds
in order to account for time subordination; recoveries in excess of 71% may be
sustained, leading to a two-notch uplift above the covered bonds rating on a
probability of default (PD) basis.
The D-Cap of 0 is driven by the full discontinuity assessment for the liquidity
gap and systemic risk component. This is due to the highly stressed economic
environment in Portugal, as evidenced by its non-investment grade sovereign
rating, which would, in Fitch's view, 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
available on www.fitchratings.com). Fitch has reviewed CGD's risk assessment for
privileged derivatives to Very Low from Moderate to reflect the termination of
both the asset and liability swaps as of end-September 2012, as communicated by
As of end-September 2012, the cover pool amounted to EUR11.2bn of prime
residential mortgage loans originated by the issuer across Portugal, with liquid
assets amounting to EUR113.8m, whereas the outstanding covered bonds amounted to
EUR7.8bn. In a 'BBB' scenario, Fitch has calculated a cumulative weighted
average (WA) foreclosure frequency of 24.1% and WA recovery rate of 81.6% for
the cover pool.
The cover pool WA life stands at 14 years, compared to 6.6 years for the covered
bonds. The resulting maturity mismatches are the largest driver of the Fitch
break-even OC for the rating, via the stressed refinancing cost assumptions
applied by the agency in modelling recoveries from the cover pool in the event
of a covered bonds default. These stressed assumptions take into account the
current levelling off of Portuguese RMBS and government debt spreads, and will
be revised if they deteriorate (see 'Covered Bonds Rating Criteria - Mortgage
Liquidity & Refinance Stress Addendum' dated 14 November 2012 at
CGD's assets and liabilities are euro-denominated. The programme has a notable
open interest position, as a total of 100% of the cover assets are floating rate
whereas 40% of the covered bonds yield a fixed rate of interest. In its cash
flow analysis, Fitch has modelled interest rate mismatches between the cover
assets and the covered bonds. The agency has also assumed that the loans paying
the highest margins are the first to default or to prepay to account for the
risk of margin compression for floating rate loans over time. The magnitude of
margin compression will not only depend on the level of prepayments and defaults
but also on the dispersion of loans margins in the cover pool.
The Fitch 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.
Additional information is available at www.fitchratings.com.
The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.
Applicable criteria: 'Covered Bonds Rating Criteria', dated 10 September 2012,
'Covered Bonds Counterparty Criteria', dated 25 July 2012, 'EMEA Residential
Mortgage Loss Criteria' dated 7 June 2012, 'EMEA Criteria Addendum - Portugal -
Mortgage Loss and Cash Flow Assumptions', dated 22 August 2012, Covered Bonds
Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum dated 14
November 2012 are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Covered Bonds Rating Criteria - Amended
Covered Bonds Counterparty Criteria
EMEA Residential Mortgage Loss Criteria
EMEA Criteria Addendum - Portugal - Mortgage and Cashflow Assumptions - Amended
Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum