DBRS Ratings Limited (DBRS) assigned a rating of AA (low) to Series 26 of the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Monte dei Paschi di Siena SpA (BMPS or the Issuer) EUR 20,000,000,000 covered bond programme (BMPS OBG1 or the Programme) guaranteed by MPS Covered Bond S.r.l.
Series 26 is a EUR one billion fixed-rate bond, which pays a coupon of 2% per annum and matures on 29 January 2024. The extended maturity date is 29 January 2062.
At the same time, DBRS discontinued the rating on Series 22, which the Issuer repaid early on 18 January 2019, following the exercise of the call option. DBRS also confirmed its ratings of all other outstanding series.
Including Series 26, there are currently 13 outstanding series of OBG under the Programme that total a nominal amount of EUR 8.65 billion.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (low), which is the Long-Term Critical Obligations Rating of BMPS. BMPS is the Issuer and the Reference Entity for the Programme. DBRS classifies the Republic of Italy (Italy; rated BBB (high) with a Stable trend by DBRS) as a jurisdiction in which covered bonds are a particularly important funding instrument and deems the cover pool (CP) strategic for the core activity of the Issuer.
--A Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A (low), which is the lowest CPCA in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of “A”.
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A level of overcollateralisation (OC) of 23.40% to which DBRS gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.85, and an Issuer-committed asset percentage of 83.0%, corresponding to a level of committed OC of 20.5%.
The transaction was analysed with DBRS’s European Covered Bond Cash Flow Tool. The main assumptions focused on the timing of defaults and recoveries of the assets and interest rate stresses. In accordance with the DBRS “Rating European Covered Bonds” methodology, no forced asset liquidations were analysed for this transaction, given the conditional pass-through structure. DBRS assumed several prepayment scenarios, ranging between a 1% and 20% prepayment rate.
Everything else being equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the covered bonds rating. In addition, the ratings would be downgraded if any of the following were to occur: (1) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects, (2) the LSF Assessment associated with the Programme were downgraded to “Average” or below or (3) the CPCA were downgraded below A (low).
BMPS OBG1 has a conditional pass-through structure. If the guarantee is enforced, the Guarantor is not contractually bound to pursue a forced asset sale of the CP in a distressed market environment. Notwithstanding this, the Guarantor can still attempt to liquidate the assets with a view to meeting its payment obligations on the pass-through series and on the earliest maturing covered bonds. In so doing, the Guarantor shall attempt to maintain the Programme’s OC proportionally to all asset sales. Additionally, the Programme documentation provides for the sale of the assets to take place only as long as the Amortisation Test (which sets the OC to a level of at least 75% of the OC resulting from the Asset Percentage used on the last Test Calculation Date preceding the service of a Guarantee Enforcement Notice) is complied with before and after the sale. Should the Amortisation Test be breached, all series switch to pass-through payment on a pari passu and pro rata basis. DBRS did not account for stresses on forced asset sales in its analysis because the Guarantor is not obliged to liquidate the assets.
The Bank of New York Mellon (Luxembourg) S.A., Milan Branch (rated AA with a Stable trend by DBRS) and The Bank of New York Mellon - London Branch (rated AA with a Stable trend by DBRS) have replaced BMPS in its capacity as the Italian and English account banks, respectively. DBRS considers the risk arising from the exposure to these entities to be consistent with the ratings assigned to the OBG, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology. Commingling and set-off risk are mitigated by the computation of such risks in the asset coverage tests.
As of December 2018, the total CP balance was EUR 11.33 billion, including EUR 10.10 billion of mortgages and EUR 1.22 billion of cash. Including Series 26, there currently are EUR 8.65 billion covered bonds outstanding under BMPS OBG1 for a total OC of 27.5%, net of commingling and set-off amounts.
As of December 2018, the mortgage CP comprised 128,845 mortgages backed by residential properties located in Italy. All mortgages were originated by either BMPS or affiliated groups. A small portion of the pool, 7.4% by loan balance as of the end of April 2018, was granted to individuals not classified as SAE 600 by the Bank of Italy. DBRS received separate default data for these borrowers and calculated a stressed default rate.
As of December 2018, the weighted-average (WA) current loan-to-value of the mortgages was 47.8% with a WA seasoning of 7.7 years. The CP is well distributed across Italy with the highest concentrations in Tuscany (17.9%), Lazio (16.0%) and Lombardy (13.9%).
The CP comprises fixed-rate loans (17.3% by outstanding balance), floating-rate loans (79.5% by outstanding balance) and loans that are currently fixed- or floating-rate but have the option to switch (3.2% by outstanding balance). The floating-rate mortgages are indexed to different plain vanilla bases and reset at different dates. Approximately 63.0% of OBG notional pays a fixed-rate coupon until the expected maturity, and if the maturity is extended, the relevant series becomes a pass-through series paying a floating rate plus a spread on a quarterly basis. DBRS considered interest rate risk mismatch in its cash flow analysis.
All CP assets and OBGs are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.
As of 30 December 2018, the WA life of the CP was 9.5 years, which is longer than the 4.3 years WA life on the OBG (calculated as of today) when accounting for the expected maturity. This risk is mitigated by the long-extended maturity date, which falls 38 years after the maturity date.
DBRS has assessed the LSF related to the BMPS OBG1 as “Very 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.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings 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, DBRS focused on the cash flow analysis.
A review of the transaction legal documents was limited to the documentation pertaining to the issuance of Series 26 and to the updated Prospectus. All the other 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 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: https://www.dbrs.com/research/333487/rating-sovereign-governments.
The sources of data and information used for these ratings include loan-by-loan data, vintage data and stratification tables provided by the Issuer and payments reports provided by Securitisation Services. DBRS considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS does not rely upon third-party due diligence in order to conduct its analysis. At the time of initial rating, DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.
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 24 October 2018, when DBRS assigned an AA (low) rating to Series 25 of BMPS CB1 programme.
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: Alessandra Maggiora, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 September 2015
DBRS Ratings Limited
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Registered in England and Wales: No. 7139960.
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
-- DBRS Criteria: Guarantees and Other Forms of Support
-- Legal 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
-- Interest Rate Stresses for European Structured Finance Transactions
-- 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.