DBRS Ratings Limited (DBRS) confirmed its “A” ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banco BPM Covered Bonds Programme 1 (Banco BPM OBG1 or the Programme), which is guaranteed by BP Covered Bond S.r.l. The rating action follows the completion of a full review of the Programme.
Concurrently, DBRS discontinued its rating on Series 10 (ISIN IT0005170284), which was reimbursed in March 2018.
As of today, there are six outstanding series of OBG, for a total nominal amount of EUR 5.25 billion under the Programme.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (high), which is the Long-Term Critical Obligations Rating (COR) of Banco BPM. Banco BPM is the Issuer and Reference Entity (RE) for the Programme. DBRS classifies Italy 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 “Adequate” associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) of BBB (high).
-- A two-notch uplift for high recovery prospects.
---A level of overcollateralisation (OC) of 5.2% to which DBRS gives credit, being the minimum observed OC level during the past 12 months, adjusted by a scaling factor of 0.9. DBRS gives limited credit to the cash portion of the CP.
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, and interest rate stresses.
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, all else unchanged, the covered bond ratings would be downgraded if the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.
Banco BPM acts as the account bank for this transaction. The replacement trigger on Banco BPM in its capacity as account bank is not fully compliant with DBRS’s counterparty criteria; hence, DBRS gives limited credit to the cash accumulating in the account bank in accordance with its “Rating European Covered Bonds” methodology.
UBS Limited acts as the covered bonds swap counterparty; however, the swap documentation is not fully compliant with DBRS’s derivatives criteria. As such, no credit was given to swap transactions in DBRS’s analysis.
The total outstanding amount of OBG is EUR 5.25 billion. As at 31 December 2018, the aggregate balance of the CP was EUR 5.2 billion of residential mortgages plus EUR 1.5 billion of cash collections, resulting in a total OC of 27.2%. However, when considering the statutory limit on integration assets and the reduced credit DBRS gives to cash, the resulting net OC amounts to 5.7%.
As at December 2018, the CP comprised 66,861 loans secured by first-rank mortgages, originated by Banco Popolare SC and network banks of the group.
The weighted-average current loan-to-value ratio of the mortgages was 52.2% with a seasoning of 7.4 years. The CP was mainly distributed in Lombardy (29.6%), Veneto (13.2%), Toscana (11.6%) and Emilia Romagna (11.1%).
The CP comprised of 26.7% fixed-for-life loans by outstanding balance and 73.3% floating-rate loans. The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset at different dates.
In comparison, 23.8% of the liabilities pay a fixed rate and 76.2% pay a floating rate linked to one- and 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 8.7 years, whereas the WAL of the OBG is 1.8 years. The resulting asset-liability maturity mismatch is 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 Programme as “Adequate”, 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.
For further information on the Programme, please refer to the rating report at www.dbrs.com.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is “Rating European Covered Bonds”.
DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
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: https://www.dbrs.com/research/333487/rating-sovereign-governments.
The sources of data and information used for these ratings include historical 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 ratings, 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 29 March 2018, when DBRS assigned the “A” rating to Series 12 and confirmed its “A” 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: Christian Aufsatz, Managing Director
Initial Rating Date: 15 February 2016
DBRS Ratings Limited
20 Fenchurch Street
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
-- 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 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 email@example.com.