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20 Jul 2010
London, 20 July 2010 -- Moody's Investors Service has taken the following rating actions on covered
bonds issued by Portuguese banks:
- Mortgage covered bonds issued by Banco BPI (BPI): downgraded
to Aa1 on review for possible downgrade, previously on 5 May 2010
Aaa placed on review for possible downgrade
- Mortgage covered bonds issued by Banco Comercial Portugues,
S.A. (BCP): downgraded to Aa2, previously on
5 May 2010 Aaa placed on review for possible downgrade
- Mortgage covered bonds issued by Banco Espirito Santo,
S.A. (BES): downgraded to Aa1 on review for possible
downgrade, previously on 5 May 2010 Aaa placed on review for possible
- Mortgage covered bonds issued by Caixa Económica Montepio
Geral (Montepio): downgraded to A2, previously on 5 May 2010
Aa1 placed on review for possible downgrade
The following ratings remain on review for possible downgrade:
- Mortgage covered bonds issued by Banco Santander Totta (BST):
Aaa on review for possible downgrade
- Mortgage covered bonds issued by Caixa Geral de Depósitos
(CGD): Aaa on review for possible downgrade
- Public sector covered bonds issued by CGD: Aaa on review
for possible downgrade
Today's rating actions on the covered bonds were prompted by the
downgrades of the banks supporting the covered bond programmes as well
as the downgrade of the sovereign.
ON 14 July 2010, Moody's downgraded the respective issuer's senior
unsecured rating as follows:
- BPI: Downgraded to A2/Prime-1 from A1/Prime-1
- BCP: Downgraded to A3/Prime-2 from A1/Prime-1
- BES: Downgraded to A2/Prime-1 from A1/Prime-1
- Montepio: Downgraded to Baa3/Prime-3 from Baa1/Prime-2
- BST: Downgraded to A1/Prime-1 from Aa3/Prime-1
- CGD: Downgraded to A1/Prime-1from Aa3/Prime-1
For further information on the rating actions taken by Moody's Financial
Institutions Group, please refer to "Moody's downgrades eight
Portuguese banks following downgrade of Portuguese government to A1"
published on 14 July 2010.
The rating actions on the banks were prompted by the downgrade of Portugal's
sovereign debt rating to A1 from Aa2. For further information on
the rating action taken by Moody's Sovereign Risk Group, please
refer to "Moody's downgrades Portugal to A1, stable outlook"
published on 13 July 2010.
The downgrade of the sovereign and bank ratings have negatively affected
the Portuguese covered bonds through their impact on both the Timely Payment
Indicator (TPI) analysis, and the expected loss analysis.
TIMELY PAYMENT INDICATORS
The TPIs have been lowered to Improbable from Probable following the downgrade
of the sovereign, as Moody's believes that the ability and willingness
of the government and financial institutions in Portugal to support any
covered bonds following an issuer default weakens as the credit strength
of the sovereign declines. Following the lowering of the TPIs to
Improbable, the combination of issuer ratings and TPIs now constrain
the ratings of the covered bonds of the following four programmes to below
- BPI covered bond ratings capped at Aa1
- BCP covered bond ratings capped at Aa2
- BES covered bond ratings capped at Aa1
- Montepio covered bond ratings capped at A2
Under the TPI framework, the ratings of the covered bonds issued
under the BST and CGD programmes can continue to be rated Aaa.
EXPECTED LOSS ANALYSIS
Moody's expected loss analysis has been negatively impacted by:
i) The downgrade of the issuer's ratings. As the credit strength
of the issuer is incorporated into Moody's expected loss methodology,
any downgrade of the issuer's ratings will increase the expected loss
on the covered bonds;
ii) The downgrade of the sovereign debt rating. The risk of sovereign
default is captured in Moody's analysis where the rating of the
covered bonds exceeds the sovereign debt rating by more than a set number
of notches. For the affected programmes, Moody's have
assumed higher stress scenarios when modeling the collateral backing the
covered bonds to account for losses in the event of a sovereign default
(see also press release "Moody's places on review for downgrade 26 Portuguese
ABS/RMBS ratings" dated 22 June 2010); and
iii) The increase in refinancing margins observed in Portugal.
The weakening economic environment in Portugal has resulted in an increase
in funding costs for the sovereign. Moody's has consequently
increased the refinancing margins used in its analysis of Portuguese covered
bonds. The refinancing margins used for Portuguese covered bonds
have increased to over 700 bps from around 350 bps.
Moody's notes that issuers may be able to offset any deterioration in
the expected loss analysis by adding further collateral to their programmes.
The ratings of the covered bonds issued by BST and CGD remain on review
for possible downgrade. During the review, Moody's
will assess the willingness of the issuers to add further collateral to
their programmes. Moody's notes that for BST and CGD,
the amounts of collateral consistent with Aaa ratings are substantial.
Moody's rating for any covered bond is determined after applying a two-step
(1) Moody's determines a rating based on the expected loss on the bond.
This is modelled as a function of the issuer's probability of default
and the stressed losses on the cover pool assets following issuer default;
(2) Moody's assigns a TPI which indicates the likelihood that timely payment
will be made to covered bondholders following issuer default. The
effect of the TPI is to limit the covered bond rating to a certain number
of notches above the issuer's rating.
The principal methodologies used in rating these transactions were "Moody's
Rating Approach to Covered Bonds", published in March 2010,
and "Assessing Swaps as Hedges in the Covered Bond Market", published
in September 2008. These can be found on www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issue can also be found in the
Rating Methodologies sub-directory on Moody's website. In
addition, Moody's publishes a weekly summary of structured finance
credit, ratings and methodologies, available to all registered
users of our website, at www.moodys.com/SFQuickCheck.
The rating assigned by Moody's addresses the expected loss posed to investors.
Moody's ratings address only the credit risks associated with the transaction.
Other non-credit risks have not been addressed, but may have
a significant effect on yield and to investors.
Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's takes negative rating actions on Portuguese covered bonds
No Related Data.
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