DBRS Confirms Ratings on Unione di Banche Italiane S.p.A. Covered Bonds (OBG - Mortgages - Programme 1) at AA (low)

DBRS Ratings Limited (DBRS) confirmed the AA (low) ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Unione di Banche Italiane S.p.A. Covered Bonds Programme 1 (UBI OBG1 or the Programme) guaranteed by UBI Finance S.r.l.

As of today, there are 12 series of OBG outstanding under the Programme, for a total nominal amount of EUR 11.4 billion.

The ratings are based on the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of A (low), being 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. DBRS does not classify Italy as a jurisdiction in which covered bonds are a particularly important funding instrument; however, DBRS deems the cover assets strategic for the core activity of the Issuer.
-- A Legal and Structuring Framework (LSF) Assessment of “Adequate” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- A LSF-Implied Likelihood (LSF-L) of “A”.
-- A two-notch uplift for high recovery prospects.
--A committed maximum asset percentage of 93%, the 24.4% minimum level of overcollateralisation (OC) observed in the last 12 months and the level of 17% that DBRS considers to be sustainable based on discussions with the Issuer and expected market developments.

The transaction was modelled with the DBRS European Covered Bond Cash Flow Tool. 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 of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high 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 is EUR 11.4 billion, while the aggregate balance of loans (as at 31 October 2017) in the CP was EUR 14.3 billion of residential mortgages plus EUR 348 million of cash collections, resulting in a total OC of 28.9%.

As at October 2017, the CP comprised 186,490 first economic ranking residential mortgages. The mortgages have been originated by network banks of the UBI group.

The weighted-average current loan-to-value ratio of the mortgages was 52.1% with a seasoning of 7.1 years. The CP was mainly distributed in Lombardy (47.4%), Lazio (10.6%) and Piedmont (8.5%), Italy.

The CP comprised fixed-for-life loans (19% by outstanding balance) and floating-rate loans (81%, 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 a three-month Euribor plus a spread. This results in 24% 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 (WAL) of the CP is 9.3 years, whereas the WAL of the OBG is 4.7 years. 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 “Adequate”, according to its rating methodology. For more information, please refer to the DBRS commentary “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework” found at www.dbrs.com.

For further information on the Programme, please refer to the rating report that is available on 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 to the ratings is “Rating European Covered Bonds.”

In DBRS opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the cash flow analysis.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include historical performance data, loan-by-loan level and stratification information on the CP provided by the Issuer.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 4 October 2017, when DBRS assigned an AA (low) rating to Series 23 and confirmed the AA (low) ratings on all other outstanding series.

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

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) 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 and U.S. regulations only.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 24 August 2015

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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
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- 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
-- Rating Sovereign Governments

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.