Standard & Poor’s has assigned a BBB- preliminary rating to an inaugural $200m seven year issue off a $500m structured covered bond programme of Panama’s Global Bank, giving it a one notch uplift over the issuer’s sub-investment grade rating.

The rating agency said that the expected maturity date is 30 April 2017, although the actual maturity date could be five to seven years after the closing date.

S&P said that given Panama’s “limited history” of covered bonds and limited market information regarding portfolio sales of the underlying mortgage loans, it has classified Panama in Category 3 under its methodology, the least supportive category.

According to S&P, the covered bonds represent a direct unconditional and unsubordinated obligation of the issuer, and are backed by a cover pool of residential mortgages denominated in US dollars and located in Panama, with bondholders having a priority claim on the assets.

The cover pool will be transferred to a guaranty trust in HSBC Investment Corp, a subsidiary of HSBC Bank (Panama) SA, which is rated BBB-.

S&P said the covered bonds’ rating reflects, in its words:

• The first recourse to Global Bank Corporation y Subsidiarias (Global Bank; BB+/Stable/B foreign currency rating).

• The second recourse to a portfolio of mortgages transferred to a guarantee trust, and the credit quality of the portfolio, which can withstand stressed credit risk during a pass-through scenario (i.e., without considering the covered bonds’ maturity date).

• The initial overcollateralization of 18.5% (one minus the amount of the liabilities divided by the amount of the assets).

• The two month reserve account to cover any potential interest shortfalls.

• The fact that 47% of the portfolio benefits from an interest rate subsidy from the government of Panama (BBB-/Positive) for the first 15 years after the loan’s origination.

• The transaction’s legal structure, which contemplates a true sale of the mortgage loans from Global Bank to the guarantee trust, effectively isolating the mortgage portfolio from the issuer’s assets in case of default.

S&P noted that a sale of the collateral may be insufficient to pay the securities on time if the issuer becomes insolvent and such a sale is necessary, but said that this is consistent with its criteria and the preliminary BBB- rating.

“The assigned preliminary rating is one notch higher than the issuer credit rating on Global Bank, which reflects our view that credit support should be sufficient to cover credit losses under a stress scenario consistent with the assigned preliminary rating,” said the rating agency. “This approach is consistent with the corporate recovery criteria, which indicate that a one notch uplift above the issuer credit rating would apply when recovery prospects are more than 70%.”

S&P said that at the assigned preliminary rating, it expects credit support to be sufficient to withstand losses of approximately 14.8%, assuming a foreclosure frequency of 28% and loss severity of 53%.

The rating agency said that because of the lack of information on mortgage asset sales, it did not make any assumptions regarding target asset spreads or asset price haircuts for Panama, which is a usual part of its covered bond rating methodology.

It said that the outlook on the covered bonds is positive, reflecting the outlook on Global Bank.