DBRS Ratings Limited (DBRS) assigned BBB (high) ratings to the obbligazioni bancarie garantite (OBG; the Italian legislative covered bonds) issued under the EUR 3,000,000,000 Banca Carige S.p.A. Covered Bonds Programme (Carige OBG3 or the Programme).
As of today, there were three series of OBG, guaranteed by Carige Covered Bond S.r.l., totalling an outstanding nominal amount of EUR 575 million under the Programme.
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. DBRS 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 BBB (low), which is the lowest CPCA in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of BBB (low).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 20.5%, as expressed in the investor report, and the 31.5% 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 and interest rate stresses.
In accordance with DBRS’s “Rating European Covered Bonds” methodology, no forced asset liquidation has been considered for this transaction, given the conditional pass-through structure, and DBRS has assumed several prepayment scenarios.
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 CB ratings.
In addition, all else unchanged, the CB ratings would be downgraded if any of the following were to occur: (1) the CPCA were downgraded below BBB (low); (2) the LSF Assessment associated with the Programme were downgraded; or (3) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.
Following an Issuer default, and if there are no sufficient funds to redeem in full any OBG Series at the relevant Maturity Date, such a Series becomes payable according to a pass-through structure, and its maturity is automatically extended up to the relevant Extended Maturity Date.
The three Series currently outstanding under the Programme have a maturity date extendable by 38 years.
BNP Paribas Securities Services SCA, Milan Branch acts as the Transaction Bank and Cash Reserve Account Bank. Based on DBRS’s private ratings of such bank and on the 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 currently EUR 575 million, while the aggregate balance of the CP, as at 31 March 2019, was EUR 788 million of residential mortgages plus EUR 36 million of cash collections, resulting in a total OC of 37.8%.
As at March 2019, the CP comprised 8,983 mortgage loans originated by Banca Carige and Banca del Monte di Lucca, which is part of the Carige Group. The weighted-average current loan-to-value of the mortgages was 52.9% with an average seasoning of 2.7 years. The assets securing the loans in the CP are located mainly in Liguria (36.0%), Tuscany (13.1%) and Lombardy (12.9%).
The CP comprised fixed-for-life loans (75.7% by outstanding balance) and floating-rate loans (24.3%). The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset at different dates. In comparison, 100% of the liabilities pay a floating rate linked to three-month Euribor.
The resulting interest and basis risks are not hedged. This has been taken into account in DBRS’s cash flow analysis.
The CP features a high portion of fixed-rate loans compared to the floating-rate liabilities, which generates a material interest rate mismatch: a significant increase in the portion of unhedged fixed rate assets, if not supported by the OC, may have a negative impact on the ratings of the CB series.
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 about 9.5 years, whereas the WAL of the OBG is 3.3 years, taking into account the expected maturity. The resulting asset-liability maturity mismatch is mitigated by the 38-year maturity extension 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” on 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.
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-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.
DBRS was not 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.
These ratings concern a newly rated financial instrument. These are the first DBRS ratings on this financial instrument.
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: Quincy Tang, Managing Director
Initial Rating Date: 21 May 2019
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.