Fitch Rates First Mortgage Bonds Issued By Banco Santander Chile
SANTIAGO, Chile -- June 3, 2013
Fitch Ratings has today assigned Banco Santander Chile's Bonos Hipotecarios
(mortgage bonds) program with an issuance amount of up to UF20 million and a
maturity of 30 years, a National Rating of 'AAA(cl)'. The Rating Outlook is
The issuance amount will be used to originate mortgage loans (mutuos
hipotecarios) that will in turn be used to finance the acquisition,
construction, repair or amplification of residential properties within up to
18 months after placement of the bonds. The first issuance of the program has
the following characteristics: series A-A: UF3 million; maturity: 15 years;
date of final maturity: 1 July 2028; interest rate: 3.2%.
Key Rating Drivers
The rating of the mortgage bonds is based on Banco Santander Chile's National
Rating for senior unsecured issuances of 'AAA(cl)' with a Negative Outlook, a
Fitch Discontinuity Cap (D-Cap) of 0 (full discontinuity, which implies a
default of the bonds in case of issuer default), and uncertainties regarding
the recovery potential provided by the related mortgage portfolio.
The D-Cap of 0 is mainly driven by the full discontinuity assessment assigned
to the sections Liquidity Gap and Systemic Risk, and Systemic Alternative
Management, which reflects the absence of any specific provision in Chile's
legislation on mortgage bonds regarding these subjects.
The risk assessments of the D-Cap components for Banco Santander Chile's
mortgage bonds program are:
Mortgages originated under the mortgage bond program are recorded in a special
register, but the cover asset cash flows are not directly used to repay
investors. This is reflected in the very high discontinuity risk for asset
segregation on the covered bonds. Nevertheless, in light of the need to carry
out a tender process following issuer insolvency, Fitch considers that the
bondholders have indirect recourse to the cover assets.
Liquidity Gap and Systemic Risk:
The full discontinuity for liquidity gap and systemic risk reflects the lack
of liquidity provisions to ensure interest and principal payments due on the
bonds post issuer default. In the event of an issuer default the mortgage bond
would likewise suffer a default.
Systemic Alternative Management:
The Chilean regulation foresees that, in the event of issuer insolvency, the
cover pool (including the mortgages and fixed-income securities) will be
tendered together with the mortgage bonds and could be taken over by another
bank. However, such transfer would be subject to delays, preventing the
timeliness of payments due under the bonds, justifying a full discontinuity
assessment for this risk component.
Cover Pool-Specific Alternative Management:
The very high risk reflects the existence of the mortgage register as well as
the issuer's careful management of documentation over mortgage loans and
experience gained from Residential Mortgage Backed Securities transactions.
Fitch assigns a very low risk to this D-Cap component given that the issuer is
only currently contemplating the issuance of mortgage bonds in UF (local
currency indexed to inflation) and will not be recurring to the use of
Fitch did not give any uplift for recoveries due to the lack of information on
the portfolio, which does not exist at the issuance date. This problem is
magnified by the lack of overcollateralisation between the cover asset and the
bonds, and the valuation of the assets stipulated by the Bonos Hipotecarios
regulation, which in Fitch's view is weak because it fully considers mortgages
with high levels of delinquency. Furthermore, in the absence of a tender at a
higher value, mortgage bond holders will be treated as senior unsecured
creditors from a recovery standpoint.
The National Rating of 'AAA(cl)' with a Negative Outlook on the mortgage bonds
is directly linked to the senior unsecured National Rating of Banco Santander
Summary of Mortgage Bonds Regulations
During 2012 the Central Bank of Chile together with the Banking Regulator
issued a new regulatory framework for the development of Bonos Hipotecarios
This new regulation allows banks to issue mortgage bonds with no special
guarantee, to allocate the funds received exclusively to grant mortgage loans
to finance the acquisition, construction, repair or extension of residential
properties. The loans will be maintained in a special register. In an event of
insolvency of the issuer, the mortgage bonds and the related mortgage
portfolio will be subject to a special procedure, under which the board of
directors will tender the mortgage portfolio maintained in the register.
Public or private financial institutions can participate in this process, with
the condition to accept to continue to pay the mortgage bonds.
In case tender offers received exceed the recovery obtained by unsecured
creditors of the issuer, the mortgage portfolio will be transferred to the
acquiring institution. In this case, the outstanding value of the mortgage
bonds will be reduced to the percentage offered, and the acquiring institution
will be liable for the payments. It is important to note that in no case
(except the tender procedure mentioned before) will the issuer be able to sell
part of the portfolio or use its cash flows to continue making payments on the
The regulation stipulates that the issuers have 18 months, from the date of
issuance of the bonds, to allocate the resources obtained to the origination
of the mortgages. After that period, and at the end of each month during the
life of the mortgage bonds, the outstanding balance of the mortgages,
excluding amounts in arrear, should not be lower than 90% of the outstanding
balance of the related bonds. Any difference between the outstanding amounts
of the mortgages and the bonds must be covered by fixed income instruments.
If, in a particular month, the outstanding balance of the mortgage portfolio
is lower than 90% of the balance of the mortgage bonds, the issuer must adjust
to that limit in the following month by incorporating new mortgages
(originated after issuance of the bonds and without arrears) or prepaying
mortgage bonds to meet the minimum requirement.
Exception from Criteria
The covered bond criteria are normally applied to debt benefiting from a dual
recourse against a financial institution and should it fail, against a pool of
assets. In the case of this transaction Fitch applies the covered bonds rating
criteria, although recourse against the cover assets is only available
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012)
--'Covered Bond Rating Criteria - Amended' (Sept. 10, 2012)
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Covered Bonds Rating Criteria
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Juan Pablo Gil
Fitch Chile Clasificadora de Riesgo Ltda.
Alcantara 200, Of. 202, Las Condes
Elizabeth Fogerty, New York, +1 212-908-0526
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