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Fitch Upgrades 4 Portuguese OH Programmes on New Covered Bonds Criteria
November 30, 2016 / 4:45 PM / a year ago

Fitch Upgrades 4 Portuguese OH Programmes on New Covered Bonds Criteria

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Portugal Covered Bond Programmes - Rating Action Report here MILAN/LONDON, November 30 (Fitch) Fitch Ratings has upgraded four Portuguese mortgage covered bonds (Obrigacoes Hipotecarias, OH) programmes and removed them from Rating Watch Positive (RWP). The rating actions conclude the implementation of the agency's revised Covered Bonds Rating Criteria published on 26 October 2016 and also follow the review of all the programmes. The OH were originally placed on RWP on 14 November 2016 (see "Fitch Places 4 Portuguese Covered Bonds Programmes on RWP" dated 14 November 2016 available at www.fitchratings.com). The rating actions are as follows: -Banco Comercial Portugues, S.A.'s (BCP; BB-/Stable/B) OH programme upgraded to 'BBB+' from 'BBB-'; off RWP; Outlook Stable -Caixa Geral de Depositos, S.A.'s (CGD; BB-/Stable/B) OH programme upgraded to 'BBB+' from 'BBB'; off RWP; Outlook Stable -Caixa Economica Montepio Geral's (Montepio, B/Stable/B) OH programme upgraded to 'A' from 'A-'; off RWP; Outlook Stable -Banco Santander Totta SA's (Totta, BBB/Stable/F2) OH programme upgraded to 'A' from 'A-'; off RWP; Outlook Stable Issuer Default Rating (IDR) Uplift Portuguese covered bonds are eligible for a maximum IDR uplift of two notches given their exemption from bail-in in a resolution scenario, Fitch's assessment that a resolution of the issuer will not result in the direct enforcement of recourse against the cover pool and the low risk of undercollateralisation at the point of resolution (see Fitch's Jurisdictional Analysis of the Risk of Undercollateralisation of Covered Bonds - Excel file published on 29 June 2016). Fitch has assigned BCP's, CGD's and Montepio's OH a two-notch IDR uplift as these banks' Long-Term IDRs are driven by their Viability Ratings. We have assigned Totta's mortgage programme a one-notch IDR uplift, as the bank's Long-Term IDR is support driven and is located in a different jurisdiction to parent Banco Santander S.A. (A-/Stable/F2). Payment Continuity Uplift (PCU) Fitch has assigned a PCU of zero notches to BCP's, CGD's and Totta's OH programmes, despite their soft-bullet feature, due to the lack of protection for timely interest payments on the covered bonds in scenarios when the recourse against the cover pool is enforced. The agency has assigned Montepio's OH programme a PCU of six notches, rather than the standard eight notches applicable to conditional pass-through programmes due to the provisions for accessing the liquidity reserve, should recourse against the cover pool be enforced. According to the programme documents, the reserve is made available upon an issuer event or if triggered by a missed payment of interest, only after the five-business day grace period has elapsed. The reserve is held by Elavon Financial Services Limited (AA/Stable/F1+). Recovery Uplift All Portuguese OH programmes benefit from the maximum recovery uplift; two-notch if the tested rating on a probability of default (PD) basis is investment grade and three notches if non-investment-grade, and if the overcollateralisation (OC) which Fitch takes into account compensates for credit losses modelled in a stress scenario corresponding to the level of the covered bonds rating. Breakeven OC for the Ratings The breakeven OC for the current rating of the programmes has increased due to higher stresses associated with higher ratings. The breakeven OC of BCP's, CGD's and Totta's OH programmes is based on the cover pool's credit loss, stressed in a rating scenario corresponding to the covered bonds rating. In Montepio's OH programme, the breakeven OC reflects the 'BBB+' tested rating on a PD basis and the outstanding recoveries at the covered bonds rating. A summary of rating steps for the programmes mentioned in this commentary can be found in the excel file "Portugal Covered Bond Programmes - Rating Action Report" dated 30 November 2016 which can be accessed in the link above. KEY RATING DRIVERS BCP OH The mortgage covered bonds of BCP are rated 'BBB+'/Stable, five notches above the bank's Long-Term IDR of 'BB-'. This is based on an unchanged IDR uplift of two notches, an unchanged PCU of zero notches and a recovery uplift of three notches. The OC of 14% which Fitch relies upon in its analysis (investor report, September 2016) provides more protection than the breakeven OC of 13.5% for a 'BBB+' rating. The breakeven OC corresponds to a 'BB+' tested rating on a PD basis and a three-notch recovery uplift and reflects a 13.7% 'BBB+' credit loss. The Stable Outlook on the OH reflects that on the bank's Long-Term IDR. Fitch has updated the asset analysis, which resulted in a 'BBB+' weighted average (WA) foreclosure frequency (FF) of 32.2% and a 'BBB+' WA recovery rate (RR) of 62.5%. CGD OH The mortgage covered bonds of CGD are rated 'BBB+'/Stable, five notches above the bank's Long-Term IDR of 'BB-'. This is based on an unchanged IDR uplift of two notches, an unchanged PCU of zero notches and a recovery uplift of three notches. The OC of 28% which Fitch relies upon in its analysis (investor report, September 2016) provides more protection than the breakeven OC of 12.5% for a 'BBB+' rating. The breakeven OC corresponds to a 'BB+' tested rating on a PD basis and a three-notch recovery uplift and reflects a 12.5% 'BBB+' credit loss. The Stable Outlook on the OH reflects that on the bank's Long-Term IDR. Fitch has updated the asset analysis, which resulted in a 'BBB+' WAFF of 30.2% and a 'BBB+' WARR of 63.3%. Montepio OH The mortgage covered bonds of Montepio are rated 'A'/Stable, nine notches above the bank's Long-Term IDR of 'B'. This is based on an unchanged IDR uplift of two notches, an unchanged PCU of six notches and a recovery uplift of two notches. The contractual OC of 18% which Fitch relies upon in its analysis provides more protection than the breakeven OC of 17.5% for the 'A' rating. The breakeven OC corresponds to a 'BBB+' tested rating on a PD basis and a two-notch recovery uplift. The Stable Outlook on the OH reflects that on the bank's Long-Term IDR. Fitch has updated the asset analysis, which resulted in a 'A' WAFF of 32.6% and a 'A' WARR of 70.0%. Totta OH The mortgage covered bonds of Totta are rated 'A'/Stable, three notches above the bank's Long-Term IDR of 'BBB'. This is based on an unchanged IDR uplift of one notch, an unchanged PCU of zero notches and a recovery uplift of two notches. The OC of 15% which Fitch relies upon in its analysis (investor report, September 2016) provides more protection than the breakeven OC of 14.0% for a 'A' rating. The breakeven OC corresponds to a 'BBB+' tested rating on a PD basis and a two-notch recovery uplift and reflects a 14.2% 'A' credit loss. The Stable Outlook on the OH reflects that on the bank's Long-Term IDR. Fitch has updated the asset analysis, which resulted in a 'A' WAFF of 28.9% and a 'A' WARR of 56.9%. CRITERIA VARIATIONS Fitch's analysis varied from the agency's "Criteria Addendum: Portugal - Residential Mortgage Assumptions" for BCP's, CGD's and Totta's OH. Fitch has increased the quick sale adjustment to 50% from 40% and lengthened the expected recovery timing to 7.5 years from five years for the relevant covered bonds' ratings to determine the WARR for those cover pools. The application of this variation is due to the lack of data and has no impact on BCP's, CGD's and Totta's OH ratings. RATING SENSITIVITIES Banco Comercial Portugues, S.A. (BCP) Obrigacoes Hipotecarias (OH) All else being equal, the 'BBB+' rating of BCP's OH is vulnerable to a downgrade if any of the following occurs: (i) the Long-Term Issuer Default Rating (IDR) of BCP is downgraded to 'B+' or below, or (ii) the relied-upon overcollateralisation (OC), which is disclosed in the investor report, decreases below Fitch's 'BBB+' breakeven OC of 13.5%. Caixa Geral de Depositos, S.A. (CGD) OH All else being equal, the 'BBB+' rating of CGD's OH is vulnerable to a downgrade if any of the following occurs: (i) the Long-Term IDR of CGD is downgraded to 'B+' or below, or (ii) the relied-upon OC, which is disclosed in the investor report, decreases below Fitch's 'BBB+' breakeven OC of 12.5%. Caixa Economica Montepio Geral (Montepio) OH All else being equal, the 'A' rating of Montepio's OH is vulnerable to a downgrade if any of the following occurs: (i) the Long-Term IDR of Montepio is downgraded to 'CCC' or below, or (ii) the contractual relied upon OC decreases below Fitch's 'A' breakeven OC of 17.5%. The 'A' rating of Montepio's OH would be upgraded to 'A+' - OH maximum achievable rating - if the OC Fitch gives credit to will be sufficient to withstand the stresses associated to this higher rating level. Banco Santander Totta SA (Totta) OH All else being equal, the 'A' rating of Totta's OH is vulnerable to a downgrade if any of the following occurs: (i) the Long-Term IDR of Totta is downgraded to 'BBB-' or below, or (ii) the relied-upon OC, which is disclosed in the investor report, decreases below Fitch's 'A' breakeven OC of 14.0%. In addition, the OH of BCP, CGD and Totta could be upgraded if protection for timely interest payments on the covered bonds is envisaged in the structures and provided enough OC is available to withstand higher rating levels. Under such a scenario, the payment continuity uplift for these programmes may be revised to six notches (from zero notches) unless there are elements that raise concerns about the standard uplift for soft bullet programmes with a 12-months principal extension. Fitch's breakeven OC for a given covered bond rating will be affected by, among other factors, the profile of the cover assets relative to outstanding covered bonds, which can change over time even in the absence of new issuance. Therefore, the breakeven OC for a covered bonds rating cannot be assumed to remain stable over time. Contact: Primary Analyst Roberto Del Ragno Associate Director +39 02 87 90 87 206 Fitch Italia S.P.A Via Morigi, 6 20123 Milan Secondary Analyst Sara De Novellis Analyst +39 02 87 90 87 295 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 on www.fitchratings.com Applicable Criteria Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016) here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 18 Jul 2016) here Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Criteria Addendum: Portugal - Residential Mortgage Assumptions (pub. 09 Jun 2015) here Criteria for Country Risk in Global Structured Finance and Covered Bonds (pub. 26 Sep 2016) here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 26 Oct 2016) here Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 16 Jun 2016) here EMEA RMBS Rating Criteria (pub. 29 Nov 2016) here Fitch's Cover Asset Refinancing Spread Level (RSL) Assumptions - Excel File (pub. 26 Oct 2016) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 May 2016) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1015566 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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