TEXT-Fitch: Portuguese tax hike could push RMBS defaults higher

(The following statement was released by the rating agency)

Oct 05 - A proposed increase in Portuguese income tax would cut household income and could have a knock-on effect on arrears and default levels in the RMBS transactions. The proposed tax hike would increase the average rate of income tax to 11.8% from 9.8% and introduce a 4% income tax surcharge for 2013.

The combination of the magnitude of the increase, the universal nature and direct effect on net income means this is likely to have a greater impact on performance than other austerity measures, such as sales taxes and cuts in public sector spending, Fitch Ratings says.

The possibility for further deterioration in performance is reflected in Fitch's base case default assumption, which takes into account the average market loan-to-value (LTV) and debt-to-income (DTI) ratios and incorporates a cushion compared with actual levels of default seen to date across transactions.

The exact impact is hard to measure, but by way of example, if this were to push a borrower with a 75% LTV mortgage from a DTI of 35% to a DTI of 45% it would increase our base case default assumptions to 10% from 8.1%. We will continue to monitor the actual impact and take action accordingly.

Transactions that are already failing to generate the necessary excess revenue to provision against defaults are most exposed to the increase in income tax. The Lusitano 4, 5 and 6 transactions are good examples. In these transactions the reserve funds have been heavily drawn (53.3%, 33.5% and 13.7% of their targets, respectively) to provision for the pipeline of loans that are in arrears by between 12 and 24 months. The Lusitano transactions were downgraded for performance reasons last month as part of a review of 30 Portuguese RMBS transactions.

Fitch increased its loss assumptions for Portuguese mortgage loans in August and has capped ratings at 'Asf'/Negative since the sovereign was downgraded in November to 'BB+'/Negative to reflect the increased risk from lower growth and a weaker sovereign credit profile.

((Bangalore Ratings Team, Hotline: +91 80 4135 5898 Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Debanjali.Ghosh.reuters.com@reuters.net))