STRUCTURED FINANCE RESEARCH

Portuguese RMBS Index Report Q2 2013: Can The Mid-Year Improvement In Arrears Continue, In Light Of Economic Downside Risks?
Primary Credit Analyst: Pedro M Gomes, London +44 (0)20 7176 3015; [Link]@[Link] Secondary Contact: Virginie Couchet, Madrid (34) 91-389-6959; [Link]@[Link] Data Analyst: Nilesh Halaria, Data Analyst, London (44) 20-7176-3649; [Link]@[Link]

Table Of Contents
Related Criteria And Research

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Table 1

Performance Indicators (%)

Q2 2013 Indices Total delinquencies 90+ day delinquencies (including defaults) Prepayment rate Economic data House price growth* Real GDP growth Unemployment rate 3.36 N.A. 17.40 (3.73) (0.35) 17.60 (0.97) (1.80) 17.30 (0.96) (0.90) 16.40 (1.42) (1.05) 15.80 5.91 4.70 1.57 5.94 4.61 1.76 5.88 4.45 1.71 5.80 4.36 1.58 5.65 3.98 1.67 Q1 2013 Q4 2012 Q3 2012 Q2 2012

*Source: Instituto Nacional de Estatstica (INE: the Portuguese National Statistics Institute); quarter-on-quarter, subject to INE's review. Source: Instituto Nacional de Estatstica; quarter-on-quarter seasonally-adjusted. Eurostat; quarter-on-quarter, seasonally adjusted. N.A.--Not available

Table 2

Scenarios For Portuguese RMBS Collateral: 2013 To 2014

Baseline effect on collateral credit quality

Actual 2012 Real GDP (year-on-year growth; %) Unemployment rate (annual average; %) House prices (year-on-year growth; %) Net mortgage lending (year-on-year growth in balances, %) ECB policy rate (annual average; %) (3.2) 15.9 (2.7)

Baseline 2013 (2.1) 19.0 (3.5) 2014 0.6 18.5 (0.5)

Comment

Despite improving export performance, the economic contraction is set to continue The unemployment rate continues to reach new highs Household debt remains very high, but house price affordability ratios are below their long-term averages Household deleveraging will likely continue, given economic risks We consider that the ECB will keep its policy rate low, given the ongoing eurozone downturn

Somewhat unfavorable Unfavorable Somewhat unfavorable

(4.1)

(2.4)

(1.4)

Somewhat unfavorable

0.75

0.50

0.50

Neutral

Sources: Instituto Nacional de Estatstica Portugal, Eurostat, OECD, Standard & Poor's. N/A--Not available.

The rate of deterioration in Portuguese residential mortgage-backed securities (RMBS) collateral eased in the second quarter of 2013. Total delinquencies in Standard & Poor's Ratings Services' index decreased slightly quarter-on-quarter for the first time in two years. Low interest rates and increased forbearance measures from originators/servicers have softened the pace of delinquencies since Q2 2012. At the same time, we believe that Portugal's struggling economy could still constrain performance. Preliminary figures from Instituto Nacional de Estatistica (the Portuguese National Statistics Institute) show that the

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Portuguese economy's real GDP grew by 1.1% in Q2 2013, and that it contracted by -2% year-on-year. Despite the growth over the quarter, we continue to forecast that Portugal's real GDP will contract by 2.1% in 2013, before mildly recovering in 2014. Overview Low interest-rates and increased forbearance measures have softened the pace of delinquencies, as they decreased for the first time in two years. Although Portugal's economy grew by 1.1% in Q2 2013, we continue to forecast that Portugal's real GDP will contract by 2.1% in 2013, with persistently high unemployment, a weak housing market, and low consumer demand. As households continue to struggle, it remains to be seen whether the slight improvement in collateral performance will continue over the rest of the year. Transaction-level credit performance varied by originator and remained in line with our expectations.

Unemployment reached 17.4% in June 2013, according to Eurostat. Disposable incomes declined and tight credit conditions continued to offer little incentive for house purchases. We consider that the real estate market will remain weak this year and that house price declines will likely continue in the short term, amid a persistent fall in domestic demand. In our view, the downside risks for the economy and the high unemployment rate will continue to pressurize the housing market during 2013. As households continue to struggle, it remains to be seen whether the slight improvement in collateral performance will continue over the rest of the year. The credit performance of the Portuguese RMBS transactions in our index remains in line with our expectations. Prepayments remained low, in light of tight credit conditions and the downturn in mortgage market activity (see chart 5). Since Q2 2012, 90 day delinquencies have declined. Overall defaults have continued to increase, albeit at a slower pace than last year. At the transaction-level, performance varied by originator. For example, the pattern of defaults in Banco Comercial Portugues S.A.'s transactions mirrored that of our index. Conversely, defaults rose in transactions originated by Banco Espirito Santo and BANIF Banco Internacional do Funchal. Following the redemption of two less-seasoned transactions and increased forbearance measures, Banco Comercial Portugues' transactions exhibited the highest year-on-year reduction of severe delinquencies in our index (see chart 2). Banco BPI S.A. and Banco Santander Totta S.A.'s transactions continue to outperform our indices for severe delinquencies and defaulted loans (see charts 2 and 4). In Q2 2013, we affirmed our ratings in SAGRES Sociedade de Titularizacao de Creditos, S.A. Douro Mortgages No. 2 and No. 4, as they continue to outperform our RMBS index (see "Ratings Affirmed In Portuguese RMBS Transactions Douro Mortgages No. 2 And No. 4 Following Review," published on May 13, 2013). Counterparty scenario analysis. In order to provide further transparency on the components of our ratings, at the end of this report, we have set out a scenario analysis using the assumption that all supporting parties are rated 'AAA' in order to demonstrate the likely ratings, were counterparties not a constraining factor (see charts 6 to 10 and table 3).

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Chart 1

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Chart 2

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Chart 3

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Chart 4

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Chart 5

Counterparty scenario analysis We have carried out a scenario analysis using the following assumptions: Scenario 1: All supporting parties are rated 'AAA'; Scenario 2: All sovereigns are rated 'AAA' and there is no cap on the ratings due to country risk; and Scenario 3: All supporting parties are rated 'AAA' and all sovereigns are rated 'AAA' and there is no cap on the ratings due to country risk. In all scenarios we have retained our assumption that projected losses could increase by up to 30% due to increased country risk in Portugal. In scenarios 2 and 3 we have ignored all of the factors that we usually take into account when determining the maximum differential between sovereign and nonsovereign ratings (see "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions," published on June 14, 2011). If these factors were taken into account, the potential outcomes could be significantly lower. The results of this analysis are intended to provide transparency on the components of our ratings and are not credit ratings in themselves. Note that the ratings list provided in table 3 is current as of Aug. 20, 2013, and as we take further rating actions, it may be subject to change.

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Chart 6

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Chart 7

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Chart 8

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Chart 9

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Chart 10

Table 3

Estimated Ratings Under Scenario Analysis (Scenario 1, Third Column From The Right. Scenario 2, Second Column From The Right. Scenario 3, Right-Hand Column.)
Scenario 1, estimated rating if all counterparties were rated 'AAA' A- (sf) BB (sf) B- (sf) B- (sf) A- (sf) A- (sf) BBB (sf) Scenario 2, estimated rating if the sovereign were rated 'AAA' A+ (sf) BB (sf) B- (sf) B- (sf) A+ (sf) A+ (sf) BBB (sf) Scenario 3, estimated rating if all counterparties and the sovereign were rated 'AAA' AAA (sf) BB (sf) B- (sf) B- (sf) AA+ (sf) A+ (sf) BBB (sf)

Transaction Atlantes Mortgages No.1 PLC Atlantes Mortgages No.1 PLC Atlantes Mortgages No.1 PLC Atlantes Mortgages No.1 PLC Azor Mortgages PLC Azor Mortgages PLC Azor Mortgages PLC

Series

Class A B C D A B C

Current rating A- (sf) BB (sf) B- (sf) B- (sf) A- (sf) A- (sf) BBB (sf)

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Table 3

Estimated Ratings Under Scenario Analysis (Scenario 1, Third Column From The Right. Scenario 2, Second Column From The Right. Scenario 3, Right-Hand Column.) (cont.)
GAMMA Sociedade de Titularizacao de Creditos, S.A. (Atlantes Mortgages No.2) GAMMA Sociedade de Titularizacao de Creditos, S.A. (Atlantes Mortgages No.2) GAMMA Sociedade de Titularizacao de Creditos, S.A. (Atlantes Mortgages No.2) GAMMA Sociedade de Titularizacao de Creditos, S.A. (Atlantes Mortgages No.3) GAMMA Sociedade de Titularizacao de Creditos, S.A. (Atlantes Mortgages No.4) GAMMA Sociedade de Titularizacao de Creditos, S.A. (Atlantes Mortgages No.5) GAMMA Sociedade de Titularizacao de Creditos, S.A. (Atlantes Mortgages No.7) GAMMA Sociedade de Titularizacao de Creditos, S.A. (Azor Mortgages No.2) HipoTotta No. 1 PLC HipoTotta No. 1 PLC HipoTotta No. 1 PLC HipoTotta No. 4 PLC HipoTotta No. 5 PLC HipoTotta No. 5 PLC HipoTotta No. 5 PLC HipoTotta No. 5 PLC HipoTotta No. 5 PLC HipoTotta No. 5 PLC HipoTotta No. 7 Ltd. HipoTotta No. 7 Ltd. HipoTotta No. 7 Ltd. HipoTotta No. 7 Ltd. HipoTotta No. 7 Ltd. HipoTotta No. 7 Ltd. Lusitano Mortgages No. 3 PLC Atlantes Mortgages No. 2 Atlantes Mortgages No. 2 Atlantes Mortgages No. 2 Atlantes Mortgage No. 3 Atlantes Mortgage No.4 Atlantes Mortgage No. 5 Atlantes Mortgages No. 7 Azor Mortgages No. 2 A A- (sf) A- (sf) AA (sf) AA (sf)

BBB (sf)

BBB (sf)

BBB (sf)

BBB (sf)

BB (sf)

BB (sf)

BB (sf)

BB (sf)

A- (sf)

A- (sf)

AA (sf)

AA (sf)

A- (sf)

A- (sf)

AAA (sf)

AAA (sf)

A- (sf)

A- (sf)

AA (sf)

AA (sf)

A- (sf)

A- (sf)

AAA (sf)

AAA (sf)

A- (sf)

A- (sf)

AA (sf)

AA (sf)

A B C A A2 B C D E F A2 B C D E F A

A- (sf) A- (sf) A- (sf) BBB (sf) BBB (sf) BBB- (sf) BBB- (sf) BB (sf) BB- (sf) CCC- (sf) BBB (sf) BBB- (sf) BB (sf) B+ (sf) B (sf) CCC- (sf) A- (sf)

A- (sf) A- (sf) A- (sf) A- (sf) BBB (sf) BBB- (sf) BBB- (sf) BB (sf) BB- (sf) CCC- (sf) A- (sf) BBB- (sf) BB (sf) B+ (sf) B (sf) CCC- (sf) A- (sf)

AAA (sf) A (sf) A (sf) BBB (sf) BBB (sf) BBB- (sf) BBB- (sf) BB (sf) BB- (sf) CCC- (sf) BBB (sf) BBB- (sf) BB (sf) B+ (sf) B (sf) CCC- (sf) A+ (sf)

AAA (sf) AAA (sf) AAA (sf) A- (sf) BBB (sf) BBB- (sf) BBB- (sf) BB (sf) BB- (sf) CCC- (sf) AAA (sf) BBB- (sf) BB (sf) B+ (sf) B (sf) CCC- (sf) AA (sf)

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Table 3

Estimated Ratings Under Scenario Analysis (Scenario 1, Third Column From The Right. Scenario 2, Second Column From The Right. Scenario 3, Right-Hand Column.) (cont.)
Lusitano Mortgages No. 3 PLC Lusitano Mortgages No. 3 PLC Lusitano Mortgages No. 3 PLC Lusitano Mortgages No. 4 PLC Lusitano Mortgages No. 4 PLC Lusitano Mortgages No. 4 PLC Lusitano Mortgages No. 4 PLC Lusitano Mortgages No. 5 PLC Lusitano Mortgages No. 5 PLC Lusitano Mortgages No. 5 PLC Lusitano Mortgages No. 5 PLC Lusitano Mortgages No. 6 Ltd. Lusitano Mortgages No. 6 Ltd. Lusitano Mortgages No. 6 Ltd. Lusitano Mortgages No. 6 Ltd. Lusitano Mortgages No. 6 Ltd. Lusitano Mortgages No. 7 Ltd. Lusitano Mortgages No. 7 Ltd. Lusitano Mortgages No.1 PLC Lusitano Mortgages No.1 PLC Lusitano Mortgages No.1 PLC Lusitano Mortgages No.1 PLC Lusitano Mortgages No.1 PLC Lusitano Mortgages No.2 PLC Lusitano Mortgages No.2 PLC B C D A B C D A B C D A B C D E A B A B C D E A B BBB (sf) BB- (sf) B- (sf) A- (sf) BBB (sf) B+ (sf) B- (sf) A- (sf) BBB- (sf) B (sf) B- (sf) A- (sf) BBB- (sf) BB (sf) B (sf) CCC (sf) A- (sf) BB- (sf) A- (sf) A- (sf) A- (sf) BB (sf) B- (sf) A- (sf) A- (sf) BBB (sf) BB- (sf) B- (sf) A- (sf) BBB (sf) B+ (sf) B- (sf) A- (sf) BBB- (sf) B (sf) B- (sf) A- (sf) BBB- (sf) BB (sf) B (sf) CCC (sf) A- (sf) BB- (sf) A- (sf) A- (sf) A- (sf) BB (sf) B- (sf) A- (sf) A- (sf) BBB (sf) BB- (sf) B- (sf) A- (sf) BBB (sf) B+ (sf) B- (sf) A+ (sf) BBB- (sf) B (sf) B- (sf) A- (sf) BBB- (sf) BB (sf) B (sf) CCC (sf) A (sf) BB- (sf) A+ (sf) A+ (sf) A- (sf) BB (sf) B- (sf) A (sf) A (sf) BBB (sf) BB- (sf) B- (sf) A- (sf) BBB (sf) B+ (sf) B- (sf) AA (sf) BBB- (sf) B (sf) B- (sf) A- (sf) BBB- (sf) BB (sf) B (sf) CCC (sf) A (sf) BB- (sf) AAA (sf) AAA (sf) A- (sf) BB (sf) B- (sf) AAA (sf) A (sf)

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Table 3

Estimated Ratings Under Scenario Analysis (Scenario 1, Third Column From The Right. Scenario 2, Second Column From The Right. Scenario 3, Right-Hand Column.) (cont.)
Lusitano Mortgages No.2 PLC Lusitano Mortgages No.2 PLC Lusitano Mortgages No.2 PLC Magellan Mortgages No. 3 PLC Magellan Mortgages No. 3 PLC Magellan Mortgages No. 3 PLC Magellan Mortgages No. 3 PLC Magellan Mortgages No. 4 PLC Magellan Mortgages No. 4 PLC Magellan Mortgages No. 4 PLC Magellan Mortgages No. 4 PLC Magellan Mortgages No.1 PLC Magellan Mortgages No.1 PLC Magellan Mortgages No.1 PLC Magellan Mortgages No.2 PLC Magellan Mortgages No.2 PLC Magellan Mortgages No.2 PLC Magellan Mortgages No.2 PLC Navigator Mortgage Finance No. 1 PLC Navigator Mortgage Finance No. 1 PLC Navigator Mortgage Finance No. 1 PLC Nostrum Mortgages 2003-1 PLC Nostrum Mortgages 2003-1 PLC Nostrum Mortgages 2003-1 PLC Pelican Mortgages No. 2 Plc C D E A B C D A B C D A B C A B C D A B C A B C A BB (sf) B (sf) B- (sf) A- (sf) BBB- (sf) BB+ (sf) B (sf) A- (sf) A- (sf) A- (sf) B (sf) A- (sf) A- (sf) BBB+ (sf) A- (sf) A- (sf) BBB+ (sf) BBB (sf) A- (sf) A- (sf) BBB (sf) BB (sf) B (sf) B- (sf) A- (sf) BB (sf) B (sf) B- (sf) A- (sf) BBB- (sf) BB+ (sf) B (sf) A- (sf) A- (sf) A- (sf) B (sf) A- (sf) A- (sf) BBB+ (sf) A- (sf) A- (sf) BBB+ (sf) BBB (sf) A- (sf) A- (sf) BBB (sf) BBB (sf B (sf) B- (sf) A- (sf) BB (sf) B (sf) B- (sf) A+ (sf) BBB- (sf) BB+ (sf) B (sf) A (sf) A (sf) A- (sf) B (sf) A (sf) A (sf) BBB+ (sf) AAA (sf) AA (sf) BBB+ (sf) BBB (sf) AAA (sf) AA+ (sf) BBB (sf) BB (sf B (sf) B- (sf) A+ (sf) BB (sf) B (sf) B- (sf) AA (sf) BBB- (sf) BB+ (sf) B (sf) AA- (sf) A (sf) A- (sf) B (sf) AAA (sf) AAA (sf) BBB+ (sf) AAA (sf) AA (sf) BBB+ (sf) BBB (sf) AAA (sf) AA+ (sf) BBB (sf) BBB (sf) B (sf) B- (sf) AAA (sf)

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Table 3

Estimated Ratings Under Scenario Analysis (Scenario 1, Third Column From The Right. Scenario 2, Second Column From The Right. Scenario 3, Right-Hand Column.) (cont.)
Pelican Mortgages No. 2 Plc Pelican Mortgages No. 2 Plc Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 1) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 1) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 1) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 1) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 2) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 2) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 2) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 2) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 2) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 3) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 3) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 3) Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 3) Douro Mortgages No. 1 Douro Mortgages No. 1 Douro Mortgages No. 1 Douro Mortgages No. 1 Douro Mortgages No. 2 Douro Mortgages No. 2 Douro Mortgages No. 2 Douro Mortgages No. 2 Douro Mortgages No. 2 Douro Mortgages No.3 Douro Mortgages No.3 Douro Mortgages No.3 Douro Mortgages No.3 B C A A- (sf) BBB (sf) A- (sf) A- (sf) BBB (sf) A- (sf) A+ (sf) BBB (sf) A- (sf) AAA (sf) BBB (sf) A- (sf)

BBB- (sf)

BBB- (sf)

BBB- (sf)

BBB- (sf)

BB- (sf)

BB- (sf)

BB- (sf)

BB- (sf)

B (sf)

B (sf)

B (sf)

B (sf)

A1

A- (sf)

A- (sf)

A- (sf)

A- (sf)

A2

A- (sf)

A- (sf)

A- (sf)

A- (sf)

BB (sf)

BB (sf)

BB (sf)

BB (sf)

B (sf)

B (sf)

B (sf)

B (sf)

B- (sf)

B- (sf)

B- (sf)

B- (sf)

BBB- (sf)

BBB- (sf)

BBB- (sf)

BBB- (sf)

B (sf)

B (sf)

B (sf)

B (sf)

B- (sf)

B- (sf)

B- (sf)

B- (sf)

B- (sf)

B- (sf)

B- (sf)

B- (sf)

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Table 3

Estimated Ratings Under Scenario Analysis (Scenario 1, Third Column From The Right. Scenario 2, Second Column From The Right. Scenario 3, Right-Hand Column.) (cont.)
Sagres Sociedade de Titularizacao de Creditos S.A. (Douro Mortgages No. 4) Sagres Sociedade de Titularizacao de Creditos S.A. (Pelican Mortgages No. 3) Sagres Sociedade de Titularizacao de Creditos S.A. (Pelican Mortgages No. 3) Sagres Sociedade de Titularizacao de Creditos S.A. (Pelican Mortgages No. 3) Sagres Sociedade de Titularizacao de Creditos S.A. (Pelican Mortgages No. 3) SAGRES Sociedade de Titularizacao de Creditos, S.A. (Pelican Mortgages No.6) TAGUS - Sociedade de Titularizacao de Creditos, S.A. (Aqua Mortgages No.1) Douro Mortgages No. 4 Pelican Mortgages No. 3 Pelican Mortgages No. 3 Pelican Mortgages No. 3 Pelican Mortgages No. 3 PELICAN MORT NO.6 A A- (sf) A- (sf) A- (sf) A- (sf)

A- (sf)

A- (sf)

A- (sf)

A- (sf)

BBB (sf)

BBB (sf)

BBB (sf)

BBB (sf)

BBB- (sf)

BBB- (sf)

BBB- (sf)

BBB- (sf)

BB (sf)

BB (sf)

BB (sf)

BB (sf)

A- (sf)

A- (sf)

A- (sf)

A- (sf)

Aqua Mortgage No. 1

A- (sf)

A- (sf)

AA (sf)

AA (sf)

Related Criteria And Research

House Prices Are Still Falling In Most European Markets As The Recession Bites, July 25, 2013 The Eurozone Economy Shows Signs Of Stabilization, But Recovery Is Still Some Way Off, June 26, 2013 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Ratings Affirmed In Portuguese RMBS Transactions Douro Mortgages No. 2 And No. 4 Following Review, May 13, 2013 Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 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 Methodology Behind European RMBS Indices, Nov. 8, 2004 Cash Flow Criteria for European RMBS Transactions, Nov. 20, 2003 Criteria For Rating Portuguese Residential Mortgage-Backed Securities, Aug. 6, 2002

Additional Contact: Structured Finance Europe; StructuredFinanceEurope@[Link]

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