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Rating Action:

Moody's upgrades Banco de Investimento Imobiliario's mortgage covered bond to Baa3

Global Credit Research - 27 Jan 2014

Action follows bond maturity extension amendment; EUR895 million of notes affected

London, 27 January 2014 -- Moody's Investors Service has upgraded to Baa3 from Ba1 the ratings of the mortgage covered bonds issued by Banco de Investimento Imobiliario, S.A. (BII), following the amendment of the final terms of Series 1 covered bonds, which now benefit from a 20-year maturity extension. Banco Comercial Portugues, S.A. (BCP; deposits B1 negative; bank financial strength rating E/ baseline credit assessment caa2, negative) is the underlying institution supporting these covered bonds.

RATINGS RATIONALE

Today's upgrade reflects (1) the amendment of the maturity extension to 20 years from 1 year of the issuer's only outstanding covered bond; and (2) an increase in the committed over-collateralisation to 7%. Following the amendment of the final terms of the Series 1 covered bonds, the extended maturity date is now in January 2017. The combination of low acceleration risk and the long maturity extension mitigates refinancing risk following issuer default, which is one of the key drivers of Moody's Timely Payment Indicator (TPI). Moody's has revised the TPI to "Probable-High" from "Improbable".

Moody's believes that the 20-year maturity extension substantially improves the probability for timely payment of principal under the bond in case the issuer fails to redeem the covered bonds in full upon maturity. Following such event, principal repayment obligations are automatically postponed until the extended maturity date, allowing cash from mortgage loan collections to meet interest and principal payments for the covered bond. BII has only one covered bond outstanding. Moody's notes that the asset liability profile should be stable for this programme because the issuer has ceased loan origination activities implying that the cover pool will remain static with no significant additional issuance activity, going forward. In Moody's opinion, these features substantially reduce the refinancing risk and improve the probability of timely payments under the bonds in case of an issuer default.

KEY RATING ASSUMPTIONS/FACTORS

Moody's determines covered bond ratings using a two-step process: an expected loss analysis and a TPI framework analysis.

EXPECTED LOSS: Moody's uses its Covered Bond Model (COBOL) to determine a rating based on the expected loss of the bond. COBOL determines expected loss as (1) a function of the issuer's probability of default (measured by the issuer's rating); and (2) the stressed losses on the cover pool assets following issuer default.

The cover pool losses are an estimate of the losses Moody's currently models if the relevant issuer defaults. Moody's splits cover pool losses between market risk and collateral risk. Market risk measures losses stemming from refinancing risk and risks related to interest-rate and currency mismatches (these losses may also include certain legal risks). Collateral risk measures losses resulting directly from the cover pool assets' credit quality. Moody's derives collateral risk from the collateral score.

The cover pool losses are 26.5%, with market risk of 19.8% and collateral risk of 6.7%. The collateral score for this programme is 10.0%. The over-collateralisation (OC) in this cover pool is 29.6%, of which BII provides 7% on a "committed" basis. The minimum OC level that is consistent with the Baa3 rating target is 7%, of which the issuer should provide 7% in a "committed" form. These numbers show that Moody's is not relying on "uncommitted" (voluntary) OC in its expected loss analysis.

For further details on cover pool losses, collateral risk, market risk, collateral score and TPI Leeway across covered bond programmes rated by Moody's please refer to "Moody's EMEA Covered Bonds Monitoring Overview", published quarterly. All numbers in this section are from Moody's most recent modelling based on data as of 30 September 2013.

TPI FRAMEWORK: Moody's assigns a "timely payment indicator" (TPI), which indicates the likelihood that the issuer will make timely payments to covered bondholders if the issuer defaults. The TPI framework limits the covered bond rating to a certain number of notches above the issuer's rating.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

The issuer's credit strength is the main determinant of a covered bond rating's robustness. The TPI Leeway measures the number of notches by which Moody's might downgrade the issuer's rating before the rating agency downgrades the covered bonds because of TPI framework constraints.

The TPI assigned to BII's mortgage covered bond programme is Probable-High. The TPI Leeway for the programme is 2 notches, meaning that BCP, the underlying institution supporting these covered bonds, would need to be downgraded to below B3 before the covered bonds are downgraded, all other things being equal.

A multiple-notch downgrade of the covered bonds might occur in certain limited circumstances, such as (1) a sovereign downgrade negatively affecting both the issuer's senior unsecured rating and the TPI; (2) a multiple-notch downgrade of the issuer; or (3) a material reduction of the value of the cover pool.

RATING METHODOLOGY

The principal methodology used in this rating was Moody's Approach to Rating Covered Bonds published in July 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's notes that on 19 September 2013 it published a Request for Comment (RFC). In the RFC, the rating agency proposes an adjustment to the anchor point it uses in its covered bond analysis. If the revised Credit Rating Methodology is implemented as proposed, the Credit Ratings of the covered bonds may be affected. Please refer to Moody's Request for Comment, titled "Approach to Determining the Issuer Anchor Point for Covered Bonds" for further details regarding the implications of the proposed Credit Rating Methodology changes on Moody's Credit Ratings https://www.moodys.com/research/Approach-to-Determining-the-Issuer-Anchor-Point-for-Covered-Bonds--PBS_SF342448.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Moody's did not use any stress scenario simulations in its analysis.

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Julie Ng
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades Banco de Investimento Imobiliario's mortgage covered bond to Baa3
No Related Data.

 

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