(The following statement was released by the rating agency)
Feb 08 - Fitch Ratings has maintained Santander Totta S.A.’s (Totta; ‘BBB-'/Negative/‘F3’) Obrigacoes Hipotecarias (OH, mortgage covered bonds) ‘BBB’ rating on Rating Watch Negative (RWN).
The maintained RWN follows a full review of the programme. Although the 30% over-collateralisation (OC) that Totta commits to is below the agency’s breakeven OC for the rating, Fitch has maintained the RWN pending the review of time subordination risk in Portuguese covered bonds and the modelling of recoveries given default. Fitch originally placed Totta’s covered bonds on RWN on the application of its updated residential mortgage loss criteria and refinancing cost assumptions to the programme.
The OH ‘BBB’/RWN rating is based on Totta’s Long-term Issuer Default Rating (IDR) of ‘BBB-', a Discontinuity Cap (D-Cap) of 0 (full discontinuity) and the OC of 30% publicly stated by the issuer on the OH’s investor reports.
The OH ‘BBB’ rating would be vulnerable to downgrade if any of the following occurred: (i) Totta’s Long-term IDR was downgraded by one or more notches; or (ii) the programme OC went below the breakeven OC that Fitch will recalculate following the review of time subordination risk for recoveries given default.
The unchanged D-Cap of 0 is driven by the liquidity gap and systemic risk assessment. The full discontinuity assessment 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 on www.fitchratings.com).
As of end-September 2012, the cover pool amounted to EUR7.8bn of prime residential mortgage loans originated by the issuer across Portugal, with liquid assets amounting to EUR448m, whereas the outstanding covered bonds amounted to EUR5.88bn. In a ‘BBB’ scenario, Fitch has calculated a cumulative weighted average (WA) foreclosure frequency of 15.2% and WA recovery rate of 80.7% for the cover pool.
The cover pool WA life stands at 7.2 years, compared with 1.4 years for the covered bonds. Totta’s cover assets and covered liabilities are euro-denominated. The programme’s interest position is relatively hedged, as the cover assets are mostly floating rate (94%) and the fixed rate covered bonds are swapped with Banco Santander S.A. (‘BBB+'/Negative/‘F2’). Given that the covered bonds and the issuer are both in the same rating category, Fitch gives credit to this liability swap although it is concluded with an entity belonging to the same banking group as the issuer.