October 16, 2013 / 3:42 PM / 6 years ago

Fitch Upgrades 2 and Affirms 2 Portuguese Mortgage Covered Bond Programmes

(The following statement was released by the rating agency) LONDON, October 16 (Fitch) Fitch Ratings has taken rating actions on the Obrigacoes Hipotecarias (OH, Portuguese mortgage covered bonds) issued by Banco BPI (BPI), Banco Comercial Portugues S.A. (BCP), Caixa Economica Montepio Geral (Montepio) and Caixa Geral de Depositos S.A. (CGD), as follows: BPI ('BB+'/Negative/'B'), OH upgraded to 'BBB+' from 'BBB', Negative Outlook BCP ('BB+'/Negative/'B'), OH affirmed at 'BBB-', Negative Outlook Montepio ('BB'/Negative/'B'), OH upgraded to 'BBB' from 'BBB-', Negative Outlook CGD ('BB+'/Negative/'B'), OH affirmed at 'BBB', Negative Outlook The rating actions follow a full review of the programmes, and notably the revision of the breakeven level of overcollateralisation (OC) for a given rating, 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 also "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 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, to 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. Fitch has maintained a Discontinuity Cap (D-Cap) of 0 (full discontinuity) for Portuguese 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 Issuer Default Rating (IDR) being in the non-investment rating category, which would, in Fitch's view, prevent a successful timely cover pool refinancing in the event of an issuer default (Portugal, 'BB+'/Negative)' (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 three notches can be granted above the issuers' IDR based on recovery prospects, provided that the covered bond's rating on a probability of default (PD) basis is in the non-investment grade rating category. The Negative Outlook on Portuguese OH reflects the Negative Outlook on the issuers' Long-term Issuer Default Rating (IDR) and on the Portuguese residential mortgage market (see '2013 Outlook: European Structured Finance', dated December 2012 at www.fitchratings.com). KEY RATING DRIVERS - BPI's OH The 'BBB+' rating is based on BPI's IDR of 'BB+', a D-Cap of 0 (full discontinuity risk) and the 45% overcollateralisation (OC) level publicly committed by the issuer. Fitch's calculated OC of 32.5% provides for at least 91% recoveries on the bond assumed to be in default and it is the breakeven OC level in a 'BBB+' level of stress The breakeven OC has decreased to 32.5% from 35%, mainly due to the lower refinancing spread assumptions applied and the recoveries given default calculation considering the recovery allocation is sequential, as included in the updated covered bond master criteria. As of 30 June 2013, the mortgage pool consisted of 109,060 loans originated by BPI, which amounted to EUR5.7bn. The cover pool also contained EUR20m of cash collected from the mortgage loans and kept at BPI. The outstanding covered bonds totalled EUR3.93bn. In a 'BBB+' scenario, Fitch has calculated a credit loss of 8.7%, with a weighted average (WA) foreclosure frequency of 27.7% and WA recovery rate of 68.6% The WA current loan-to-value (LTV) of the mortgages was 55.6%. The cover pool weighted-average life stands at 13.5 years, compared to 5.3 years for the covered bonds. All assets and liabilities are euro-denominated. Floating-rate mortgages within the pool comprise 95.2%, while loans with fixed interest rate are 4.8%. With regards to interest rate hedging, BPI only has a swap agreement in place on the fixed-rate liability, entered with Barclays Bank plc (A/Stable/F1). RATING SENSITIVITIES- BPI's OH The OH 'BBB+' rating would be vulnerable to downgrade if any of the following occurred: (i) BPI's IDR was downgraded by one or more notches; or (ii) the programme OC went below Fitch's 'BBB+' breakeven OC of 32.5% 'BBB+'. KEY RATING DRIVERS - BCP's OH The 'BBB-' rating is based on BCP's IDR of 'BB+', a D-Cap of 0 and a publicly committed OC of 26.5%. This OC level is above the 'BBB-' break-even OC of 26% calculated by Fitch. This break-even level of OC is sufficient to grant a one-notch uplift for recoveries in excess of 51% on the bond assumed to be in default in a 'BBB-' rating scenario. The breakeven OC has marginally decreased to 26% from 26.5% as the positive effects of the downward revision of refinancing spread assumptions and the recoveries given default calculation were offset by the lower credit quality of the cover assets compared to peers, significant maturity mismatches and unmitigated interest rate risks. Fitch has reviewed BCP's risk assessment for privileged derivatives to Very Low from Moderate to reflect the termination of both the asset and liability swaps, as communicated by the issuer. As of 30 June 2013, the mortgage pool consisted of 229,600 loans originated by the issuer with an outstanding balance of EUR11.9bn, whereas the outstanding covered bonds amounted to EUR8.85bn. In a 'BBB-' scenario, Fitch has calculated a credit loss of 12.8%, with a WA foreclosure frequency of 30.2% and WA recovery rate of 57.5%. The WA current LTV of the mortgages was 59.3%, as calculated by Fitch. The cover pool weighted-average life stands at 14.2 years, compared to 3.1 years for the covered bonds. All assets and liabilities are euro-denominated. The programme has a notable open interest position, as a total of 93.4% of the cover assets are floating rate whereas 40% of the covered bonds yield a fixed rate of interest. RATING SENSITIVITIES - BCP's OH The OH 'BBB-' rating would be vulnerable to downgrade if any of the following occurred: (i) BCP's IDR was downgraded by one or more notches; or (ii) the programme OC went below the 26% breakeven OC calculated by Fitch. KEY RATING DRIVERS - Montepio's OH The 'BBB' rating is based on Montepio's IDR of 'BB', D-Cap of 0 and 35% OC that the issuer publicly commits to in its investor report. This level of OC is sufficient to achieve outstanding recoveries in excess of 91% in a 'BBB' scenario, allowing a three-notch recovery uplift to 'BBB' for the covered bonds rating. The 'BBB' break-even OC level calculated by Fitch is 26%. The breakeven OC has decreased to 26% from 35% mainly due to the lower refinancing spread assumptions applied and the recoveries given default calculation considering the recovery allocation is sequential, as included in the updated covered bond master criteria. As of 30 June 2013, the cover pool consisted of 53,169 prime residential mortgage loans originated by Montepio, worth EUR2.73bn and liquid assets (in the form of highly rated public sector assets) amounting to EUR14m, whereas the outstanding covered bonds amounted to EUR2bn. In a 'BBB' scenario, Fitch has calculated a credit loss of 7.1%, with a WA foreclosure frequency of 26.0% and WA recovery rate of 72.6%. The WA current LTV of the mortgages was 58.6%, as calculated by Fitch. The cover pool weighted-average life stands at 11.7 years, compared to 3.5 years for the covered bonds. All assets and liabilities are euro-denominated. Montepio's covered bonds benefit from an asset swap with The Royal Bank of Scotland N.V (RBS, A/Stable/F1). The asset swap covers the basis risk of the floating rate mortgages and interest rate risk for 4.61% of fixed assets; all covered bonds are floating rate. RATING SENSITIVITIES - Montepio's OH The OH 'BBB' rating would be vulnerable to downgrade if any of the following occurred: (i) Montepio's IDR was downgraded by one or more notches; or (ii) the programme OC went below the 26% breakeven OC calculated by Fitch. KEY RATING DRIVERS - CGD's OH The 'BBB' rating is based on CGD's IDR of 'BB+', a D-Cap of 0 (full discontinuity risk) and publicly committed OC of 35%. The 20.5% break-even level of OC calculated by Fitch is sufficient to grant a two-notch uplift for at least 71% recoveries on the bond assumed to be in default in a 'BBB' rating scenario. The breakeven OC has decreased to 20.5% from 35%, mainly due to the lower refinancing spread assumptions applied and the recoveries given default calculation considering the recovery allocation is sequential, as included in the updated covered bond master criteria. As of 30 June 2013, the mortgage pool consisted of 243,687 loans originated by CGD across Portugal with outstanding balance of EUR10.4bn, whereas the outstanding covered bonds amounted to EUR7.45bn. In a 'BBB' scenario, Fitch has calculated a credit loss of 8.6%. The rating default rate and the rating recovery rate for this scenario are 24.2% and 64.2%, respectively. The WA current LTV of the mortgages was 52.1%, as calculated by Fitch. The cover pool WA life stands at 14.9 years, compared to 6.1 years for the covered bonds. All assets and liabilities are euro-denominated. No privileged derivatives are in place to mitigate the open position as 42% of covered bonds yield fixed rate and all assets are floating rate. RATING SENSITIVITIES - CGD's OH The OH 'BBB' rating would be vulnerable to downgrade if any of the following occurred: (i) CGD's IDR was downgraded by two or more notches; or (ii) the programme OC went below the 20.5% 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. Contact: Primary Analyst Anastasiya Kapustina Analyst +44 203 530 1516 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Roberto Del Ragno Analyst +39 02 87 90 87 206 Committee Chairperson Federica Fabrizi Senior Director +39 02 87 90 87 232 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Covered Bonds Rating Criteria', dated 04 September 2013, 'Counterparty Criteria for Structured Finance and Covered Bonds', dated 13 May 2013, 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', dated 13 May 2013, 'Covered Bond Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum' dated 3 June 2013, 'EMEA Residential Mortgage Loss Criteria', dated 6 June 2013 and 'EMEA Criteria Addendum - Portugal' dated 30 July 2013 are available at www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum here EMEA Residential Mortgage Loss Criteria here EMEA Criteria Addendum – Portugal here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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