DBRS Finalises Provisional Ratings of Unione di Banche Italiane S.c.p.a. Covered Bonds Guaranteed by UBI Finance S.r.l.

DBRS Ratings Limited (DBRS) has today finalised its provisional ratings of AA (low), Under Review with Developing Implications of the Unione di Banche Italiane S.c.p.a (UBI or the Issuer) Obbligazioni Bancarie Garantite (OBG, the Italian legislative covered bonds) outstanding under the EUR 15,000,000,000 covered bond programme (UBI OBG1 or the Programme) guaranteed by UBI Finance S.r.l. There are 13 series of OBG outstanding for a total nominal amount of EUR 10.49 billion as of 23 September 2015.

DBRS is reviewing the implications of recent developments in the European regulation and legislation regarding the Bank Recovery and Resolution Directive. The review on the covered bonds will be resolved only once the review on the Issuer Rating is resolved.

The AA (low) rating assigned to UBI OBG1 reflects the following analytical considerations:
-- A Covered Bonds Attachment Point reflective of UBI’s likelihood to meet its payment obligations on the OBG. UBI is the Issuer and the Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Strong assigned to the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB, being the lowest CPCA in line with the final covered bond rating.
-- An LSF-Implied Likelihood (LSF-L) of A (high).
-- One notch uplift for good recovery prospects.

The transaction was modelled with the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and market value spreads to calculate liquidation values on the cover pool.

Everything else being equal, and based on the current methodology without accounting for the potential impact of the finalisation of the Request for Comments for the “Rating European Covered Bonds” methodology currently outstanding, a downgrade of the Reference Entity rating by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch. In addition, the ratings of the Programme would be downgraded if any of the following occurs: (1) the sovereign rating of the Republic of Italy were downgraded below A (low), (2) the quality and consistency of the cover pool were no longer sufficient to support one notch uplift for good recovery prospects, (3) the LSF Assessment associated with the Programme were downgraded or (4) volatility in the financial markets caused the currently estimated market value spreads to increase.

The Request for Comments period for the “Rating European Covered Bonds” methodology (the Methodology) came to an end on 8 September 2015, when DBRS published an updated version of the Methodology. The Methodology incorporates a new analysis for deriving the Covered Bonds Attachment Point (CBAP) of all European Covered Bonds (CB) programmes that have a Reference Entity (RE) that is subject to the Bank Recovery and Resolution Directive (BRRD), enacted on 15 May 2014, or an equivalent regime. The method involves the use of the RE’s senior unsecured rating (RE-SUR) as a reference rating for the CBAP and the possibility of notching up to one or two notches above that reference depending on DBRS’s assessment of two main factors: (1) the importance of the RE for the economic and financial system of the relevant country; and (2) the importance of the CB as an instrument for the economic and financial system of the relevant country and for the core business of the RE. However, the new method will only be applied once the review of the Issuer Rating is resolved.

DBRS has assessed the LSF related to the UBI OBG1 as Strong according to its rating methodology. The Strong LSF Assessment associated with the UBI Programme reflect DBRS’s view of: (1) the satisfactory level of segregation provided by the OBG legal framework and the covered bond holders first priority right on the cover pool (CP), in combination with appropriate contractual mitigants in relation to set-off, commingling and clawback risk; (2) the composition of the CP being 100% prime residential mortgage loans to borrowers concentrated in an A (low) Domicile Sovereign, combined with a contractual provision to automatically extend each and all CB maturities by 12 months upon an event of default of the Issuer, while a firesale of the CP is triggered immediately following such event of default; (3) a contractual dynamic liquidity reserve set on each payment date prior to an Issuer event of default to a level sufficient to cover CB interests and senior costs (including payments under the hedge agreements) due during the subsequent six months rolling; and (4) the role of the Bank of Italy in the supervision of the Italian OBG, combined with the good penetration of the OBG as a funding tool for Italian banks and an asset monitor that only indirectly reports to the regulator.

The Bank of New York Mellon, London Branch, acts as English account bank and is rated AA/R-1 (high) with Stable trends by DBRS. BNP Paribas Securities Services, London Branch, holds the swap collateral account bank and qualifies as eligible institution in accordance with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology. Commingling and set-off risk are mitigated respectively by the cash reserve and the computation of such risk in the nominal value test. The swap counterparty is UBI and it is already posting collateral in accordance with DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

As of end of May 2015, the CP included EUR 14.7 billion of first economic ranking residential mortgage loans and EUR 350.9 million of cash.

The CP comprised 190,100 residential mortgages. The mortgages have been originated by all the network banks part of the UBI group.

The weighted-average current loan-to-value of the mortgages was 48.11% with a seasoning of 5.9 years. The CP was mainly distributed between Northern Italy (66% by outstanding balance with 47% in Lombardy), Central Italy (16%) and Southern Italy (18%).

The CP comprised fixed-rate loans (27.6% by outstanding balance, which includes mixed loans as well as optional loans currently featuring a fixed-rate coupon) and floating-rates loans (72.4%). The floating-rate mortgage loans are indexed to different plain vanilla basis and reset at different dates. The interest rate risk is hedged with contingent liabilities swaps that will be entered into upon the service of an Issuer default notice or transfer of UBI’s obligations to another party. In such case, the guarantor will receive the fixed coupon on 70% of the fixed-rate liabilities notional and pay three-month Euribor plus a spread. This results in 25% of total liabilities being fixed rate, as opposed to 27.6% fixed-rate mortgages balance in the cover pool.

All CP assets are denominated in euros, as well as all OBG. As such, investors are not currently exposed to any foreign exchange risk.

As of the cut-off date the weighted-average life of the cover pool was 10.3 years based on 0% pre-payment rate, which is longer than the 4.5 years weighted-average life on the OBG when taking into account the expected maturity. This risk is partially mitigated by the 12-month maturity extension in case of an Issuer event of default and by the overcollateralisation.

Notes:
On 14 September 2022, DBRS Morningstar updated the notes section of this press release to reflect the correct initial rating date of 24 August 2015.

All figures are in euros unless otherwise noted.

The principal methodology applicable is: “Rating European Covered Bonds.” This can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include historical default performance data and loan-by-loan level information on the cover pool provided by the Issuer that allowed DBRS to further assess the portfolio. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis. DBRS was supplied with third-party assessments. However this did not impact the rating analysis.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This is the first DBRS rating action since the Initial Rating Date.

For further information on DBRS historic default rates published by the European Securities and Markets Administration in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Vito Natale
Initial Rating Date: 24 August 2015
Initial Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
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The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Rating European Covered Bonds
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model Methodology for European Securitisations

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375