DBRS assigned its first covered bond rating outside Canada yesterday (Thursday), “A (low)” to mortgage covered bonds issued by Caixa Económica Montepio Geral, and an official at the Portuguese bank said that the rating had been sought to maintain access to ECB funding.

Montepio is one of three Portuguese issuers with covered bonds rated Baa3/BBB- by other raters after Fitch cut four programmes yesterday.

Fitch downgraded three Portuguese banks’ covered bonds after increasing to 100% the Discontinuity Factor it assigns to their programmes, reflecting a view that a covered bond default cannot be avoided in the event of an insolvency of the issuer.

The rating agency yesterday (Thursday) cut mortgage covered bonds issued by Caixa Geral de Depósitos (CGD), Banco Comercial Português, and Banco Popular Portugal, and public sector covered bonds issued by CGD:

• CGD mortgage covered bonds cut from A- to BBB, removed from Rating Watch Negative (RWN)
• CGD public sector covered bonds cut from BBB to BBB-, maintained on RWN pending receipt of updated information about pool performance
• BCP mortgage covered bonds cut from BBB+ to BBB-, removed from RWN; and
• Banco Popular covered bonds cut from A+ to A-, maintained on RWN as is the issuer’s rating

As CGD and BCP covered bonds are rated Baa3 by Moody’s and BBB- by Fitch (only the public sector covered bonds in CGD’s case), these Portuguese covered bonds are on the brink of losing their eligibility for use in repo operations with the European Central Bank (ECB), warned analysts. And with Montepio’s covered bonds already facing a similar predicament (being already Baa3/BBB- before yesterday’s Fitch actions), DBRS’s rating was seen as potentially acting as a further buffer for the Portuguese issuer in maintaining ECB repo access.

Fernando Teixeira, deputy director, funding, at Montepio, told The Covered Bond Report that this was the rationale for seeking the new rating.

“We have decided to sign a deal with DBRS for a rating of our covered bond programme to have one additional rating agency in our programme,” he said, “because our programme was already rated by two rating agencies, but both of them were at the minimum acceptable level in order to discount the covered bonds with the ECB.

“In order for the covered bonds to be eligible they have to have at least one rating of at least BBB- and, just in case, we believe that it would be better to have a third rating agency in the covered bond programme just to have one additional option.”

DBRS’s rating is three notches higher than those of Fitch and Moody’s.

“We know that there is a difference between the ratings from the other two and the one from DBRS, but that’s their decision,” said Teixeira. “With the OC that we are maintaining in the programme, which is 35%, they said to us that for this OC commitment they will rate the covered bonds with A (low), and we have accepted it because we have that OC commitment to Fitch.

“We could, if we wanted to, have said to them that we can go a little bit lower and commit to a lower OC and they would have given us a rating in the BBB or BBB+ area, but if we are committing to Fitch with the 35% OC, it would not make sense to commit with a lower OC to DBRS.”

Teixeira said that Montepio will be retaining Fitch and Moody’s.

“The investors could be a little bit worried if we would eliminate one of the other rating agencies from the programme, but we are not going to do that,” he said. “We will maintain it as clear as possible and it is our intention to keep the three rating agencies in the programme.”

DBRS rates Montepio BBB (low) as an issuer and cited the following as factors in its covered bond rating:

• The Covered Bonds are senior unsecured direct deposit obligations of Caixa Económica Montepio Geral, which is rated BBB (low) with Negative trends by DBRS.
• Portuguese Covered Bonds Laws which in case of issuer insolvency give the holders of the Covered Bonds recourse to the cover pool in priority to other creditors.
• DBRS Legal and Structuring Assessment of “Adequate”.
• Issuer Commitment Overcollateralisation level of 35%.
• Montepio’s capabilities with respect to origination of cover pool assets and servicing of the cover pool.
• The credit quality of the collateral and structural features of the Programme (Extendable Maturity, collateral eligibility criteria, and interest rate derivatives).

“DBRS credit analysis is performed on a loan-level basis and includes a probability of default and loss given default assessment, an originator- and servicer-specific historical performance review, a Portuguese housing market and property price trend evaluation, and finally a cashflow simulation based on various stresses to prepayments, timing of defaults and recoveries and interest rates,” said the rating agency. “DBRS made appropriate adjustments to our model parameters based on the analysis of market value declines in DBRS and the historical performance data provided by the originator and servicer.”

DBRS will release its full rating report next week.

Fitch’s rating actions resulted from a downgrade of Portugal from BBB- to BB+, on negative outlook, last Thursday (24 November) and cuts to the banks’ issuer ratings last Friday.

Following the downgrade of the sovereign, Fitch believes that each of the aforementioned covered bond programmes is critically exposed to refinancing risk following an assumed issuer default, as a refinancing of the cover assets in such a situation would be extremely improbable within the timeframe provided for in the programme documentation.

“The agency therefore no longer believes there should be a difference between the issuing bank’s issuer default rating (IDR) and the covered bond ratings on a probability of default (PD) basis,” it said, “and reflected this through an increase in the D-Factor assigned to each programme to 100%.”

This means that, all else being equal, a change to the issuer rating will translate into a similar action on the respective covered bond rating.

Uplift from the ratings on a PD basis granted for recoveries amounted to one notch in the case of CGD (public sector backed), BCP, and BPP covered bonds, and two notches for CGD’s mortgage covered bonds.

Fitch said that the sovereign cut and the downgrade of several Portuguese banks has not had any impact on the ratings of covered bonds issued by Caixa Económica Montepio Geral, rated BBB-, and Banco Santander Totta (Totta), rated AA-, with the D-Factor of these two programmes affected in line with other Portuguese covered bonds.

The rating agency also applied its covered bonds counterparty criteria, noting mortgage covered bond programmes for BPP, CGD, Montepio and Totta have liquidity mitigants to cover any potential shortfall of interest occurring after an issuer default, but that the worsening of the D-Factor overrides this. The same applies to pari-passu termination payments potentially due to a swap counterparty assumed to be in default, according to Fitch.

Fitch said that it will deal with the ratings of Portugal’s Banco BPI in a separate release.