DBRS Ratings Limited (DBRS) assigned a BBB rating to Series 640 Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the EUR 5.0 billion Banca Carige S.p.A. Covered Bonds Programme (Carige OBG1 or the Programme).
Concurrently, DBRS discontinued its rating from Series 612, which matured on 24 October 2018.
The ratings reflect the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) reflective of the likelihood that the source of payments will switch from the reference entity (RE) to the cover pool (CP). Banca Carige is the Issuer and RE for the Programme. There is no Critical Obligations Rating associated with the RE but DBRS currently classifies the Republic of Italy as a jurisdiction for which covered bonds (CBs) are a particularly important financing tool.
-- A Legal and Structuring Framework (LSF) Assessment of “Adequate” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BB, which is the lowest CPCA in line with the final LSF-Implied Likelihood (LSF-L).
-- An LSF-L of BB (high).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 22%, as expressed in the investor report, and the 29.3% OC to which DBRS gives credit, equal to the minimum level observed in the last 12 months, adjusted by a scaling factor of 0.93.
The transaction was analysed using 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 CP.
Everything else being equal, a two-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the CBs’ ratings.
In addition, all else unchanged, the ratings of the CBs would be downgraded if any of the following occurs: (1) the LSF assessment associated with the Programme were downgraded; (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 were to move adversely; or (4) volatility in the financial markets were to cause the currently estimated market value spreads to increase.
BNP Paribas Securities Services SCA, Milan Branch acts as the account bank for this transaction. Based on its private rating and on the replacement provisions included in the documentation, DBRS considers the risk of such counterparty consistent with the ratings assigned, in accordance with the “Legal Criteria for European Structured Finance Transactions” and “Rating European Covered Bonds” methodologies.
Credit Suisse International is the CP Swap Counterparty; however, the swap documentation is not aligned with DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology. Therefore, no credit was given to swaps in DBRS’s analysis.
The total outstanding amount of OBG is currently EUR 2.5 billion. The aggregate balance of the CP, as at 31 July 2018, totalled EUR 3.6 billion of residential (95% of the loan balance) and commercial (5%) mortgages plus EUR 150 million of cash, resulting in total OC of 34.1%.
The CP comprised 51,987 mortgage loans originated by network banks that are part of the Banca Carige Group.
The weighted-average current loan-to-value ratio of the mortgages was 44.7% with an average seasoning of 7.3 years. The assets securing the loans in the CP were mainly distributed in the Italian regions of Liguria (40.0% of the loan balance), Tuscany (12.0%) and Lombardy (11.2%).
The CP comprised fixed-for-life loans (26.0% by outstanding balance) and floating-rate loans (74.0%). The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset at different dates.
In comparison, 39.5% of the liabilities pay a fixed rate and 60.5% pay a floating rate linked to three-month Euribor plus a spread. The resulting interest and basis risks are considered as unhedged in DBRS’s cash flow analysis.
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 8.0 years, whereas the WAL of the OBG, as of today, is 4.2 years, taking into account the expected maturities. The resulting asset-liability maturity mismatch is mitigated by the 15-month maturity extension in case of an Issuer event of default and by the OC.
DBRS has assessed the LSF related to the Programme as “Adequate”, according to its “Rating European Covered Bonds” methodology. For more information, please refer to the DBRS commentary “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework” on www.dbrs.com.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is “Rating European Covered Bonds.”
In DBRS opinion, the changes 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 limited to the documentation pertaining to the issuance of the Series 640.
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 default performance data, loan-by-loan level data 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 20 February 2018, when DBRS confirmed its BBB ratings on the Series outstanding under the Programme and removed the UR-Neg. status.
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 US regulations only.
Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 23 November 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
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses 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
-- Rating CLOs Backed by Loans to European SMEs
-- Rating CLOs and CDOs of Large Corporate Credit
-- 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.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at firstname.lastname@example.org.