Approximately €29.8 Billion of Debt Securities Affected
Frankfurt am Main, July 15, 2011 -- Moody's Investors Service has today downgraded the ratings of 18 tranches
of 13 Portuguese asset-backed securities (ABS) and 95 tranches
of 29 residential mortgage-backed securities (RMBS) transactions.
12 ABS tranches from 7 ABS deals remain on review for possible downgrade.
Moody's has also placed on review the Aaa(sf) rating of an ABS tranche
guaranteed by the European Investment Fund (Aaa) as the benefit of the
guarantee may be conditional to the performance of transaction parties.
Today's rating actions follow 1) Moody's decision to downgrade the Portuguese
government's debt rating to Ba2 from Baa1 on 4 July 2011; 2)
Moody's revision of the key collateral assumptions for Portuguese
receivables; and 3) the ongoing rating review initiated on 9 June
2011 of Portuguese banks that are key transaction parties in Portuguese
structured finance transactions.
Full rating details, key collateral assumptions, credit enhancement
levels and key drivers of the senior notes ratings for each transaction
are detailed in the separate data supplement:
- ABS: http://moodys.com/viewresearchdoc.aspx?docid=PBS_SF255447
- RMBS: http://moodys.com/viewresearchdoc.aspx?docid=PBS_SF255448
LTR Finance 5 is not affected by this rating action as the originator
has announced publicly that it will redeem the transaction on 26 July
2011.
For Caravela SME No. 1, the originator is proposing to restructure
the transaction by introducing an independent cash manager and increasing
the credit enhancement. Moody's does not take action on this
transaction at this time. However, all classes of notes remain
on review for possible downgrade pending implementation of restructuring
proposal .
RATINGS RATIONALE
- HIGHEST RATING FOR MOST PORTUGUESE STRUCTURED FINANCE TRANSACTIONS
IS A2(SF)
Moody's no longer expects most Portuguese structured finance transactions
to retain or achieve a rating higher than A2(sf), which is six notches
above the government's rating. This determination reflects
the weaknesses in the Portuguese economy and in the government's balance
sheet, which together with the changes in the euro area support
framework prompted Moody's recent multi-notch downgrades
of the Portuguese government's rating. These weaknesses include
poor economic growth prospects exacerbated by planned austerity measures,
deterioration in the sovereign and local banks' creditworthiness,
and highly uncertain market refinancing conditions. We have discussed
the relationship between sovereign ratings and structured finance ratings
in "Assessing the Impact of the Eurozone Sovereign Debt Crisis on
Structured Finance Transactions" Moody's Special Report April
2011. The highest rating achievable for most Portuguese structured
finance transactions reflects the rating level beyond which structural
features or credit enhancement cannot fully mitigate the impact of severe
events and the level of uncertainty around them.
The weak economic environment and the fragility of Portugal's fiscal situation
have increased risk for structured finance transactions. The difficult
economic environment will impair the debt repayment capacity of individuals
and SMEs. The fragile fiscal situation has resulted in a targeted
deficit reduction of 3% by 2013 from an actual deficit of 9.1%
in 2010, as projected in the EU-IMF program. This
reduction will lead to a cut in public spending, an increase in
taxes, and efforts to increase tax compliance in the context of
weak economic growth, all of which hurt obligor performance.
The combination of the weak macroeconomic environment and a weaker banking
system will result in declining availability of credit, which in
turn would result in refinancing difficulties for SMEs. Many Portuguese
SMEs are either borrowers in ABS transactions or employ obligors in the
pools backing consumer ABS or RMBS.
As a consequence of this scenario, the capabilities of the Portuguese
banks to perform as transaction parties, such as servicers,
may be affected in the future which in our view increases the operational
risk for the transactions.
- INCREASING COLLATERAL RISK AND DECLINING CREDIT QUALITY OF TRANSACTION
PARTIES DRIVE STRUCTURED FINANCE RATINGS
Subject to the maximum rating guidelines above, in analyzing each
structured finance transaction, Moody's addresses the increasing
risk of Portuguese collateral and the increasing risk of disruption in
the performance of transaction parties.
1) Increasing Collateral Risk
Although the reported performance of Portuguese collateral has been relatively
stable in recent periods especially for RMBS, as a result of the
weaknesses described above, Moody's expects deteriorating
performance for individual obligors on mortgage, consumer and auto
loans, as well as for small and medium-sized enterprises
(SMEs).
Other factors are increasing risk for RMBS collateral. Most mortgage
loans in the securitized pools are floating-rate loans, which
means that obligors are also vulnerable to rising interest rates.
As a result, Moody's has updated its assumptions for Portuguese
RMBS. For RMBS pools, Moody's has revised base-case
losses on current pool balance in ranges from 2% for the better
pools, which are those with good performance, moderate LTVs
and high seasoning. Moody's revised the base-case
losses to 5,5% for riskier pools. Ranges of credit
enhancement under Moodys' RMBS model, MILAN Aaa CE,
is from 12% to 30%.
Moody's also has updated its assumptions for Portuguese ABS.
For ABS consumer pools, Moody's has updated its default assumptions
for the Nova 4 transaction to 9% of the current pool's balance.
For all other transactions, key collateral assumptions remained
unchanged as Moody's has recently set or reviewed them.
For ABS SME pools, Moody's has recently revised assumptions
on SMEs loans in seasoned transactions to align these assumptions with
those for transactions rated in 2010 and 2011. In those transactions
the SME loan default assumption is consistent with the default rate of
an obligor with a B-equivalent rating.
As a result of the increasing risk of Portuguese collateral, most
Portuguese structured finance transactions cannot retain or achieve ratings
above A2(sf) unless they benefit from (i) external and unconditional guarantees
from highly rated counterparties; (ii) are cash-collateralized;
or (iii) have both a robust structure and an asset pool that are relatively
less sensitive to country risk. Moody's has placed on review
the Aaa(sf) rating of an ABS tranche guaranteed by the European Investment
Fund (Aaa) because the benefit of the guarantee may be conditional to
the performance of transaction parties. One ABS tranche that is
cash collateralized by reserve funds with a P-1 rated bank has
retained a A1(sf) rating. Two ABS backed by electricity tariff
deficit receivables are now A1(sf) but remain on review for possible downgrade,
as discussed in more detail below.
Some RMBS and ABS senior tranches may retain A2(sf) ratings if they benefit
from high credit enhancement and have low performance disruption risk
(see paragraph 2 below). High credit enhancement is 13-25%
for RMBS (depending on pool characteristics), 30-35%
for consumer ABS and 40-45% for SME ABS.
2) Increasing Risk of Performance Disruption
In line with rating guidance entitled "Global Structured Finance Operational
Risk Guidelines: Moody's Approach to Analyzing Performance Disruption
Risk", published in March 2011, Moody's has considered
the impact of the potential deterioration of credit quality of transaction
parties in Portuguese ABS and RMBS as well as operational risk mitigants
such as available liquidity.
The key transaction parties affected are servicers. Most Portuguese
ABS and RMBS servicers are Portuguese banks, most of which have
their ratings currently under review for downgrade. The transactions'
calculation agents and cash managers are either Portuguese banks or other
European or American banks.
In assessing the impact of the potential deterioration of transaction
parties, Moody's addresses the credit quality of the parties
together with the amount of liquidity and credit enhancement in the transaction.
For transactions that have adequate liquidity and have servicers that
are banks that currently have ratings at or above A3, the senior
notes can retain A2(sf) ratings, subject to minimum credit enhancement
tests described above. Transactions serviced by Portuguese banks
that have current debt ratings in the Baa range and benefit from independent
cash managers and sufficient liquidity can retain ratings of A3(sf),
again subject to credit enhancement tests. All other transactions
have had their senior debt ratings downgraded to Baa1(sf) and below because
of Moody's conclusion that the risk of performance disruption is
not consistent with single-A ratings.
Moody's placed on review the Aaa(sf) rating of class B of Douro
SME 1 which the European Investment Fund (EIF) (Aaa) guarantees.
The reason for the review is the uncertainty whether or not the cash manager
can calculate the shortfall under the guarantee upon a servicer disruption
and failure to produce a servicer report.
In addition, Moody's has maintained the ratings of 12 tranches
in 7 ABS transactions on review for downgrade pending the implementation
of various remedies in relation to commingling, set-off or
back-up servicing arrangements.
Should the ABS and RMBS transactions not implement remedies following
trigger breaches, Moody's may further downgrade some tranches
by one to two notches.
If the ongoing ratings review of most Portuguese banks results in downgrades
of more than three notches from the current ratings, then the ratings
of Portuguese structured finance transactions may undergo further adjustments.
- MOODY'S DOWNGRADES TO A1(SF) RATINGS OF TWO PORTUGUESE ELECTRICITY
TARIFF DEFICIT ABS; RATINGS REMAIN UNDER REVIEW
Moody's has today downgraded to A1(sf) from Aaa(sf) the ratings
of the two electricity tariff deficit transactions, EnergyOn No.1
and No2 issued by Tagus - Sociedade de Titularização
de Créditos, S.A. and leaves the ratings on
review for possible downgrade.
Moody's believes that remote macroeconomic stress scenarios involving
sharp spikes in electricity prices or declines in consumption, combined
with severe fiscal tightening, increase the risk of politically
motivated changes to the terms of the tariff deficit repayment mechanism
underlying the transactions. In addition, the rating agency
believes that severe financial distress scenarios for EDP Distribuição
-- Energia, S.A., a subsidiary
of EDP -- Energias de Portugal, S.A.
(rated Baa3/P-3), in its capacity as agent of the Portuguese
national electricity system for the delivery of payments on the assets
securitised, increase the risk of payment disruptions.
During its rating review, Moody's will investigate the mechanisms
designed to ensure timely payment on the notes in the event of mismatches
between the revenues and the costs of the Portuguese electricity system.
RATING METHODOLOGIES
The determination of the highest achievable ratings and minimum credit
enhancement requirements described above complement the applicable principal
methodologies for each asset class.
Four major asset-class methodologies apply. The principal
methodology used in rating RMBS transactions was Moody's Approach to Rating
RMBS in Europe, Middle East, and Africa, published in
October 2009. The principal methodology used in rating Consumer
ABS transactions was Moody's Approach to Rating Consumer Loan ABS Transactions,
published in July 2011. The principal methodology used in rating
Auto ABS transactions was Moody's Approach to Rating European Auto ABS,
published November 2002. The principal methodology used in rating
ABS SME was Moody's Approach to Rating CDOs of SMEs in Europe, published
February 2007.
To identify the principal methodology for each of the other asset classes
of the affected transactions, please refer to the index of methodologies
under the research and ratings tab on Moodys.com.
Moody's rating methodology for the electricity tariff deficit transactions
considers the strength of the specific legislation enacted to set forth
the regulatory claims and the repayment mechanisms, the creditworthiness
and strategic role of the distribution grid operator, EDP Distribuição
--
Energia, S.A., and the creditworthiness of key
counterparties. For further information on the rating approach,
please see the new issue reports publicly available for the EnergyOn No.1
and No. 2 Securitisation Notes.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with amendment resulting from that disclosure.
Information sources used to prepare the rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments related to the monitoring of this transaction
in the past six months.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
The lead analyst and rating office for each of the transactions affected
are generally different from the contact and office listed at the end
of this press release. For each transaction, the lead analyst
name is available on the issuer page, and the rating office is available
on the ratings tab of the issuer on www.moodys.com.
Moody's adopts all necessary measures so that the information it uses
in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not an auditor
and cannot in every instance independently verify or validate information
received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the credit rating action. Please see the
ratings disclosure page on our website www.moodys.com for
further information.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Frankfurt am Main
Sebastian Schranz
Associate Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Paris
Carole Gintz
VP - Senior Credit Officer
Structured Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Portuguese ABS and RMBS structured finance transactions
