DBRS Ratings Limited (DBRS) assigned a AA rating to the Series 31 (ISIN IT0005364663) 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).
Concurrently, DBRS discontinued its rating on Series 21 (ISIN IT0005202343), which was reimbursed in December 2018, and confirmed its AA ratings on all other outstanding OBG under the Programme.
As of today, and including the newly issued series, there were 18 series of OBG, guaranteed by UBI Finance S.r.l., totalling an outstanding nominal amount of EUR 13.6 billion under the Programme.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (low), which is the Long-Term Critical Obligations Rating of Unione di Banche Italiane SpA (UBI). UBI is the Issuer and Reference Entity for the Programme. DBRS classifies the Republic of 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.
-- A Cover Pool Credit Assessment (CPCA) of BBB, which is the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (high).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 15.5% to which DBRS gives credit, which is the minimum observed OC level over the past 12 months adjusted by a scaling factor of 0.85.
The transaction was analysed 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 CP.
Everything else being equal, a one-notch downgrade of the CBAP would lead to a two-notch downgrade of the LSF-L, resulting in a two-notch downgrade of the covered bonds ratings.
In addition, all else unchanged, the OBG ratings would be downgraded if any of the following occurred: (1) the CPCA were downgraded below BBB; (2) the LSF Assessment associated with the Programme were downgraded; (3) the quality of the CP and level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (4) the relative amortisation profile of the OBG and CP moved adversely; or (5) volatility in the financial markets caused the currently estimated market value spreads to increase.
UBI acts as the Account Bank, which also holds the Reserve Account. Based on the ratings of UBI and on the Account Bank’s replacement provisions included in the documentation, DBRS considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with its “Legal Criteria for European Structured Finance Transactions” methodology.
The total outstanding amount of OBG is EUR 13.6 billion, while the aggregate balance of the CP, considering data as at 31 January 2019, is EUR 15.5 billion of residential mortgages plus EUR 615 million of cash collections, resulting in a total OC of 18.3%.
As at January 2019, the CP comprised 201,945 first-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 51.5% with a seasoning of 7.2 years. The CP was mainly distributed in Lombardy (44.2%), Lazio (12.0%) and Piedmont (7.7%).
The CP comprised fixed-for-life loans (27.5% by outstanding balance) and floating-rate loans (72.5% by outstanding balance), the latter of which includes mixed loans as well as optional loans currently featuring a fixed-rate coupon. The floating-rate mortgage loans are indexed to different plain-vanilla bases and reset at different dates.
In comparison, 81.0% of the liabilities pay a fixed rate and 19.0% pay a floating rate linked to three- and six-month Euribor. The resulting interest and basis risks are unhedged. This has been considered 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 9.3 years, whereas the WAL of the OBG, as of today, was 5.1 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 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.
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’s opinion, the change under consideration does 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 final terms of Series 31.
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 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 10 December 2018, when DBRS assigned ratings of AA to Series 29 and 30 and confirmed the ratings of the other CB Series outstanding under the Programme at AA.
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: 24 August 2015
DBRS Ratings Limited
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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
-- 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.