DBRS Ratings Limited (DBRS) assigned ratings of “A” to Series 34 and Series 35 of the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Monte dei Paschi di Siena S.p.A. (BMPS or the Issuer) EUR 20 billion covered bond programme (BMPS OBG2 or the Programme) guaranteed by MPS Covered Bond S.r.l. 2.
Each series is a EUR 500 million floating-rate bond indexed to three-month Euribor plus a margin of 0.90% for Series 34 and 0.98% for Series 35. Series 34 will mature in January 2023 and Series 35 in May 2023. As with all other series under the Programme, both issuances will benefit from a maturity extension to the Long Due for Payment Date of 31 December 2057.
Currently there are 14 series of OBG outstanding under the Programme, including the newly issued series, for a total nominal amount of EUR 7.55 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 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 CP Credit Assessment (CPCA) of BBB (low), which is the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (low).
-- A one-notch uplift for good recovery prospects.
-- A level of overcollateralisation (OC) of 17.4% to which DBRS gives credit and which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.9. BMPS commits to a maximum asset percentage of 86.2%, which translates into a contractually committed level of OC of 16%.
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 DBRS’s “Rating and Monitoring 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, ranging between a 1% and a 20% prepayment rate.
Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bond rating by one notch.
In addition, the ratings of the Programme would be downgraded if any of the following were to occur: (1) the quality of the CP and level of OC were no longer sufficient to support a one-notch uplift for good recovery prospects, (2) the LSF Assessment associated with the Programme were downgraded to Average or (3) the CPCA were downgraded below BBB (low).
Following an Issuer default, the maturities of all OBG are extended to the Long Due for Payment Date and cash flows from the CP are allocated to all series on a pro rata and pari passu basis and distributed to OBG holders via a modified pass-through mechanism. According to such mechanism, monies are accumulated in an account opened by the guarantor with an eligible institution and paid out on the expected maturity date of each OBG. This implies negative carry and has been taken into account in DBRS’s cash flow analysis.
The Issuer performs several roles under the Programme documents, among which the account bank. DBRS considers the risk arising from the exposure to BMPS, which has a critical obligations rating of BBB (low), to be consistent with the “A” ratings assigned to the OBG, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.
The OBG holders benefit from a reserve that is sufficient to cover senior costs and interest payments on the OBG for the subsequent six months rolling.
As of June 2019, the total CP balance was EUR 10.0 billion, including EUR 8.6 billion of mortgages and EUR 1.4 million of principal receipts. Currently, including Series 34 and 35, there are almost EUR 7.6 billion of covered bonds outstanding under BMPS OBG2, giving a total OC of 32.9%.
As of June 2019, the mortgage CP comprises mortgages secured on residential properties (73.9% by outstanding loan balance) as well as commercial properties (26.1%). The CP comprises 89,938 mortgages with a weighted-average (WA) unindexed current loan-to-value ratio of 40.7%, based on unindexed property values. The pool is well seasoned, with a WA seasoning of 8.4 years. Geographically, the pool is also well diversified across Italy, with the three largest concentrations in the regions of Tuscany (26.0%), Lazio (14.5%) and Lombardy (12.0%).
The reference rates of the underlying loans were floating rate (70.0%), fixed rate (22.4%) and optional (7.6%), while all OBG outstanding carry a floating coupon. As there are no hedging agreements in place, OBG holders are exposed to interest rate mismatch, which has been taken into account in DBRS’s cash flow analysis.
All CP assets and liabilities are denominated in euros. As such, investors are not currently exposed to any foreign exchange risk.
As of June 2019, the WA life of the CP was 8.2 years, which is longer than the 1.9-year WA life on the OBG when taking into account the expected maturity (calculated as of today). This risk is mitigated by the Long Due for Payment Date, which falls on 31 December 2057.
DBRS has assessed the LSF related to the BMPS OBG2 Programme as “Very Strong”, according to its rating methodology. For more information, please refer to the DBRS commentaries “DBRS Assigns LSF Assessment to Italian Covered Bonds” and “Italian Obbligazioni Bancarie Garantite: 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 and Monitoring Covered Bonds.”
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 34 and 35. 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 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 investor reports and stratification information on the CP provided by the Issuer that allowed DBRS to further assess the portfolio.
DBRS considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of initial rating, DBRS was not 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 8 August 2019, when DBRS confirmed its “A” ratings of BMPS CB2 following the completion of the annual review of the 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 U.S. regulations only.
Lead Analyst: Alessandra Maggiora, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 3 September 2013
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 and Monitoring Covered Bonds
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads
-- Global Methodology for Rating Banks and Banking Organisations
-- 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
-- Rating CLOs and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European SMEs
-- Interest Rate Stresses for European Structured Finance Transactions Methodology
-- 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.