DBRS Assigns AA (low) Rating to Unione di Banche Italiane S.p.A. Covered Bonds (OBG – Mortgages – Programme 1) Series 18 – Tranche 3 Guaranteed by UBI Finance S.r.l.

DBRS Ratings Limited (DBRS) has today assigned a AA (low) rating to the Series 18 – Tranche 3 Obbligazioni Bancarie Garantite (OBG, i.e., the Italian legislative Covered Bonds) issued under the Unione di Banche Italiane S.p.A. EUR 15,000,000,000 Covered Bonds Programme 1 (UBI OBG1, or the Programme) guaranteed by UBI Finance S.r.l. The Series 18 – Tranche 3 OBG is a EUR 250 million fixed-rate OBG, paying a fixed coupon of 1% per annum and maturing in January 2023.

Concurrently, DBRS has confirmed the AA (low) rating on the other OBG outstanding under the Programme. Following the issuance of the Series 18 – Tranche 3 OBG, there are 14 series of OBG for a nominal amount of EUR 11.99 billion outstanding under the Programme.

The AA (low) ratings assigned to UBI OBG1 reflect the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of “A,” which is the Long-Term Critical Obligations Rating of Unione di Banche Italiane S.p.A. (UBI). UBI is the Issuer and Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Strong associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), which is the lowest CPCA in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (high).
-- A one-notch uplift for good recovery prospects.
-- A committed maximum asset percentage of 93.0%, the 21% minimum level of overcollateralisation (OC) 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 using 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 (CP).

Everything else being equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the Covered Bonds rating. 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 quality and consistency of the CP were no longer sufficient to support a one-notch uplift for good recovery prospects, (3) the relative amortisation profile of the OBG and CP moved adversely or (4) volatility in the financial markets caused the currently estimated market value spreads to increase.

The Bank of New York Mellon – London Branch acts as the 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. Set-off risk is mitigated by the computation of such risk in the nominal value test. The swap counterparty, UBI, is already posting collateral in accordance with DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

The total outstanding amount of OBG, following the issuance of the Series 18 – Tranche 3, is EUR 11.99 billion, while the aggregate balance of loans (as at 31 August 2016) in the CP is EUR 14.65 billion of residential mortgages plus EUR 805 million of cash collections, resulting in a total OC of 28.5%.

As at August 2016, the CP comprised 188,130 first economic 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 ratio of the mortgages was 52.1% with a seasoning of 6.6 years. The CP was mainly distributed in Lombardy (46.9%), Lazio (10.6%) and Piedmont (8.7%).

The CP comprised fixed-for-life loans (15.5% by outstanding balance) and floating-rate loans (84.5%, which includes mixed loans as well as optional loans currently featuring a fixed-rate coupon). The floating-rate mortgage loans are indexed to a different plain-vanilla basis 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 five 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 OC.

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

The A (low) Long-Term Issuer Rating of the Republic of Italy was placed Under Review with Negative Implications on 5 August 2016. Given the soft bullet nature of the Programme, with a 12-month extension period, a hypothetical sovereign downgrade to BBB (high) would trigger a downgrade of the LSF Assessment to Adequate from the current level of Strong. However, with a CPCA assumed unchanged at BBB (low), the current LSF-implied likelihood of A (high) could be maintained even with an LSF Assessment of Adequate. DBRS ran additional stress scenarios and expects that the OC to which it gives credit is still able to support a BBB (high) CPCA following a one-notch sovereign downgrade. As a result, DBRS expects no impact on the ratings of the Programme due solely to a one-notch sovereign downgrade.

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” (July 2016). 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 the Series 18-Tranche 3 OBG. 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 found at 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 levels and stratification information on the CP provided by the Issuer.

DBRS considers the information available to it for the purposes of providing this rating to be 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 7 October 2016 when DBRS confirmed the AA (low) rating to the Programme, following completion of the annual review.

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

For further information on DBRS historical default rates published by the European Securities and Markets Authority 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

Lead Surveillance Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Quincy Tang, Managing Director

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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.