(The following statement was released by the rating agency)
Jan 10 -
-- On Dec. 14, 2012, we placed our ‘BBB’ ratings on Portugal-based Banco Santander Totta’s mortgage-covered bond program on CreditWatch negative, due to an increased likelihood that the program would not fully meet our updated counterparty criteria by Jan. 11, 2013, when the transition period ends.
-- Since then, the bank has provided us with amended documents that we believe will enable the program to meet our updated criteria.
-- We are therefore maintaining the CreditWatch negative status pending the implementation of the amendments, which the issuer expects to complete by the end of January at the latest.
-- We expect to resolve the CreditWatch by the end of January after a further review, either by affirming the ratings or lowering them by up to two notches.
Standard & Poor’s Ratings Services said today that its ‘BBB’ ratings on Obrigacoes hipotecarias (mortgage-covered bonds) issued by Portugal-based Banco Santander Totta S.A. (BB/Negative/B) remain on CreditWatch, where they were placed with negative implications on Dec. 14, 2012.
Today’s CreditWatch update follows our review of the bank’s progress in mitigating counterparty credit risks in line with our criteria (see “Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions,” published on May 31, 2012, on RatingsDirect on the Global Credit Portal).
Since the CreditWatch placement in December last year we have received updated information on amendments to the counterparty documentation, which if implemented, should enable the program to maintain the ‘BBB’ rating. Without these amendments we would lower the ratings on the program by up to two notches.
Because swap termination payments rank pari passu with payments on the covered bonds under Portuguese Covered Bond Law, our updated counterparty criteria limit the ratings on the program (see paragraph 36 of “Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions”). At ‘BB’, the ICR on the issuer is speculative grade, therefore this limit depends on the structure of the swap documentation:
-- If the documentation includes a counterparty replacement framework that conforms with our criteria, then the issue rating is limited to the higher of the ICR on the issuer plus one notch (‘BB+'), or the ICR on the counterparty plus one notch (in this case the counterparty is not rated).
-- If there is no counterparty replacement framework that meets our criteria, then the rating is limited to the higher of the ICR on the issuer plus one notch (‘BB+') or the ICR on the counterparty.
Without amendments to the swap documentation, the rating would therefore be limited to ‘BB+'. The issuer intends to substitute existing swap agreements for new contracts with a sufficiently rated counterparty and expects to finalize the process by the end of January. Given the relatively short time frame between Jan. 11, our implementation deadline, and the expected implementation of the issuer’s measures, we have decided to keep the ratings on CreditWatch.
Under our criteria in “Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds,” published Dec. 16, 2009, the ratings on the program could be four notches above the ICR. As of Sept. 28, 2012, the available credit enhancement in Banco Santander Totta’s mortgage covered bond program is lower than the target credit enhancement, and only commensurate with three notches of uplift above the ICR. This enables the program to achieve a ‘BBB’ rating.
We have also applied our criteria for rating nonsovereign issuers and structured finance transactions--including covered bonds--above the rating on the related sovereign in the eurozone (European Economic and Monetary Union), which we refer to as our ”EMU criteria”. These criteria determine the maximum rating differential between sovereign and covered bond ratings, based on the sovereign rating level and the covered bond program’s country-risk exposure (see ””https://www.globalcreditportal.com/ratingsdirect/showArticlePage.do?object_id =6587605&rev_id=8&sid=943463&sind=A&“,” published on June 14, 2011). This assessment caps any potential further uplift typically available under our criteria for rating covered bonds.
Under our EMU criteria, a mortgage-covered bond program that has what we consider to be low country-risk exposure would typically achieve a maximum uplift of six notches above the investment-grade rating on the country in which the cover pool assets are located. If the sovereign rating is in the speculative-grade category (lower than ‘BBB-'), the maximum uplift is five notches. Because our long-term rating on Portugal is currently ‘BB’, our EMU criteria do not constrain our rating on Banco Santander Totta’s mortgage-covered bond program and related series.
We aim to resolve the CreditWatch by the end of January, either by affirming the ratings or lowering them by up to two notches.
-- Covered Bond Ratings Framework: Methodology And Assumptions, June 26, 2012
-- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012
-- Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions, May 31, 2012
-- Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised Methodology And Assumptions For Target Asset Spreads, April 24, 2012
-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Methodology: Credit Stability Criteria, May 3, 2010
-- Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds, Dec. 16, 2009
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Update To The Cash Flow Criteria For European RMBS Transactions, Jan. 6, 2009
-- Update To The Criteria For Rating Portuguese Residential Mortgage-Backed Securities, Jan. 6, 2009
-- European Legal Criteria For Structured Finance Transactions, Aug. 28, 2008
-- A Listing Of S&P’s New Actions Aimed At Strengthening The Ratings Process, Feb. 7, 2008
-- Cash Flow Criteria for European RMBS Transactions, Nov. 20, 2003
-- Criteria for Rating Portuguese Residential Mortgage-Backed Securities, Aug. 6, 2002
Ratings Remain On CreditWatch
Banco Santander Totta S.A.
Portugal: Mortgage Covered Bonds (Obrigacoes Hipotecarias)