Press Release

DBRS Morningstar Discontinues Ratings on Novo Banco S.A. Covered Bonds (Obrigações Hipotecárias - Mortgages - CPT)

Covered Bonds

October 20, 2023

DBRS Ratings GmbH (DBRS Morningstar) discontinued and withdrew the credit ratings on all outstanding series of the Novo Banco S.A. Covered Bonds programme (Obrigações Hipotecárias - Mortgages - CPT) (the "Programme"). The decision to discontinue and withdraw the credit ratings was made at the request of the Issuer. Prior to the discontinuation, DBRS Morningstar confirmed its A credit ratings on all the outstanding series.

The credit ratings are based on the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of BB (high), which is the Long Term Critical Obligations Rating of Novo Banco. Novo Banco is the Reference Entity (RE) for the Programme. DBRS Morningstar considers the assets in the Programme to be strategic to the RE’s core activity.
-- A Legal and Structuring Framework (LSF) Assessment of “Adequate” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (high), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of BBB (high).
-- A two-notch uplift for high recovery prospects.
-- The level of overcollateralisation (OC) of 9.0% to which DBRS Morningstar gives credit, which is the minimum level observed in the past 12 months adjusted by a scaling factor of 0.9.
-- The sovereign rating of the Republic of Portugal, rated A with a Stable trend by DBRS Morningstar, as of the date of this SRC.

DBRS Morningstar analysed the transaction using its European Covered Bond Cash Flow tool. The main assumptions focused on the timing of defaults and recoveries of the assets, and interest rate stresses.

Everything else equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the CB ratings.

In addition, all else unchanged, the OH ratings would be downgraded if any of the following occurred: (1) the CPCA was downgraded below BBB (high); (2) the LSF Assessment associated with the Programme was downgraded; or (3) the quality of the cover pool (CP) and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.

As of 30 June 2023, the aggregated outstanding balance of the CP underlying the Issuer’s OH was EUR 7.4 billion. The total amount of liabilities outstanding is EUR 5.50 billion, yielding a current nominal OC ratio of 35.4%.

The majority (99.4%) of the assets in the CP are prime residential mortgage loans while the balance is made up of a cash reserve. As at June 2023, the mortgage CP assets comprised 133,819 residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 49.8%, a WA seasoning of 93.7 months, and a WA remaining time to maturity of 302.6 months. The CP is located mainly in Lisbon (45.8% by outstanding balance), northern Portugal (26.2%), and central Portugal (16.4%).

Novo Banco’s OH do not benefit from hedging agreements to cover the mismatch between the interest paid by the CP (8.1% fixed rate and 91.9% floating rate linked to different indexes and reset dates) and the interest paid to the OH holders (linked to three-month Euribor plus 25 basis points (bps) with quarterly resets). If the bond maturity is extended, the outstanding series become pass-through, paying one-month Euribor plus 25 bps on a monthly basis. The OC available mitigates this risk, which DBRS Morningstar accounted for in its cash flow analysis.

DBRS Morningstar calculated the WA life of the mortgage assets to be roughly 15 years based on a 0% prepayment rate, which exceeds the WA life on the OH of 2.8 years, not accounting for any maturity extension. The conditional pass-through nature of the OH mitigates this risk.

All CP assets and OH are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.

DBRS Morningstar assessed the LSF related to the programme as “Adequate” according to its rating methodology. For more information, please refer to DBRS Morningstar’s publications “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review,” both available at www.dbrsmorningstar.com.

DBRS Morningstar’s credit ratings on the outstanding CB series address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related interest payment amounts and the related principal amount.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on the Issuer are likely to have an impact on this credit rating.
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://www.dbrsmorningstar.com/research/416784.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: “Global Methodology for Rating and Monitoring Covered Bonds” (8 May 2023), https://www.dbrsmorningstar.com/research/413651.

Other methodologies referenced in this transaction are listed at the end of this press release.

In DBRS Morningstar’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS Morningstar focused on the cash flow analysis.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/421590.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The sources of data and information used for this credit rating include investor reports provided by the Issuer and its withdrawal request.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 2 December 2022 , when DBRS Morningstar Confirmed “A” Ratings on the series outstanding under the Programme.

The lead analyst responsibilities for this transaction have been transferred to Antonio Laudani.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 15 December 2015

DBRS Ratings GmbH, Sucursal en España
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259]

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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