Fitch upgraded Santander Totta mortgage covered bonds from BBB to BBB+ yesterday (Tuesday) because of a new approach it is taking to modelling recoveries from defaulted covered bonds where there is time subordination.

The obrigações hipotecarias had been on Rating Watch Negative. The outlook is negative.

Fitch said that the rating is based on the Portuguese issuer’s default rating of BBB-, a Discontinuity Cap of 0 (full discontinuity) and 30% overcollateralisation publicly stated by the issuer in its investor reports.

“This level of OC is in line with the agency’s breakeven OC and allows a two notch uplift being granted for at least 91% recoveries achieved on the longest dated bond given that all other outstanding bonds are paid in full,” it said.

The upgrade reflects a new way in which the rating agency is evaluating recovery prospects in defaulted covered bonds where there is time subordination, which it announced yesterday and said is expected to lead to lower breakeven OC for affected programmes, such as Portuguese and French legislative issuance. (See here for previous coverage.)