DBRS Assigns Rating to Unione di Banche Italiane S.p.A. Covered Bonds Guaranteed by UBI Finance S.r.l. Series 21

DBRS Ratings Limited (DBRS) has today assigned a AA (low) rating to the Series 21 Obbligazioni Bancarie Garantite (OBG, the Italian legislative Covered Bonds) issued under the Unione di Banche Italiane S.p.A. (UBI or the Issuer) EUR 15,000,000,000 covered bond programme (UBI OBG1 or the Programme) guaranteed by UBI Finance S.r.l. Series 21 is a EUR 750 million floating-rate OBG, indexed to 3-month Euribor plus 0.02% and maturing in December 2018.

Concurrently, DBRS has confirmed its AA (low) rating on the other OBG outstanding under the Programme. Following the issuance of Series 21, there are 14 series of OBG for a nominal amount of EUR 11.74 billion outstanding under the Programme.

The AA (low) ratings assigned to UBI OBG1 reflect the following analytical considerations:
-- A Covered Bonds Attachment Point of “A”, being the Long-Term Critical Obligations Rating of UBI. UBI is the Issuer and 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 (low), being the lowest CPCA in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-Implied Likelihood (LSF-L) of A (high).
-- A one-notch uplift for good recovery prospects.
-- A committed maximum asset percentage of 93%, the 30.3% minimum level of overcollateralisation observed in the last 12 months, and a reduced level DBRS considers sustainable based on discussions with the issuer and expected market developments.

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, a downgrade of the CBAP 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, everything else being equal, the OBG ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below BBB (low), (2) the sovereign rating of the Republic of Italy were downgraded below A (low), (3) the quality and consistency of the cover pool were no longer sufficient to support a one-notch uplift for good recovery prospects, (4) the LSF Assessment associated with the Programme were downgraded, (5) the relative amortisation profile of the OBG and cover pool (CP) moved adversely or (6) volatility in the financial markets caused the currently estimated market value spreads to increase.

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 an 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.

The total outstanding amount of OBG is EUR 11.74 billion (as of today), while the aggregate balance of loans (as of 31 May 2016) in the cover pool (CP) is EUR 15.09 billion of residential mortgages plus EUR 495 million of cash collections, resulting in a total overcollateralisation (OC) of 32.8%.

As of April 2016, the CP comprised 181,001 economically first-ranking residential mortgages. The mortgages have been originated by all the network banks that are part of the UBI group.

The weighted-average current loan-to-value of the mortgages was 51.5% with a seasoning of 6.8 years. The CP was mainly distributed in Lombardy (45.8%), Lazio (10.4%) and Piedmont (8.7%).

The CP comprised fixed-for-life loans (13.8% by outstanding balance) and floating-rate loans (86.2%, which includes mixed loans as well as optional loans currently featuring a fixed-rate coupon). The floating-rate mortgage loans are indexed to different plain vanilla bases and reset at different dates. The interest rate risk is hedged with contingent liability 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 22% of total liabilities being fixed rate post-swap.

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

The weighted-average life of the cover pool is longer than the 4.6 years weighted-average life of the OBG, calculated 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.

DBRS has assessed the LSF related to the UBI OBG1 as Strong according to its rating methodology. For more information, please refer to DBRS commentary “Italian Covered Bonds Legal and Structuring Framework Review”, available at www.dbrs.com.

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 at http://www.dbrs.com/about/methodologies. In DBRS’s opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, an asset analysis was not conducted. A review of the transaction’s legal documents was limited to the documentation pertaining to the issuance of Series 21. All the other documents have remained unchanged since the most recent rating action.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release. This may be found at http://www.dbrs.com/about/methodologies.

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, loan-by-loan level as well as stratification 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 these ratings 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.

The last rating action on this transaction took place on 20 June 2016, when DBRS assigned AA (low) rating to Series 18-Tranche 2.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

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, Senior Vice President
Initial Rating Date: 24 August 2015
Initial Rating Committee Chair: Quincy Tang, Managing Director

Lead Surveillance Analyst: Vito Natale, Senior Vice President
Rating Committee Chair: Diana Turner, Senior Vice President

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

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Global Methodology for Rating Banks and Banking Organisations
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for 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
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model Methodology for European Securitisations
-- The Effect of Sovereign Risk on Securitisations in the Euro Area
-- Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings

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