DBRS Ratings GmbH (DBRS Morningstar) confirmed its BBB ratings of the obbligazioni bancarie garantite (OBG; the Italian legislative covered bonds) issued under the EUR 5,000,000,000 Banca Carige S.p.A. Covered Bonds Programme (Carige OBG1 or the Programme). This rating action follows the completion of a full review of 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 S.p.A. (Carige) is the Issuer and RE for the Programme. DBRS Morningstar classifies Italy as a jurisdiction in which covered bonds are a particularly important funding instrument and deems the 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 BB, which is the lowest CPCA in line with the final LSF-Implied Likelihood (LSF-L).
-- An LSF-L of BB (high).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 22%, as expressed in the investor report, and the 30.6% OC to which DBRS Morningstar 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 Morningstar 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 two-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the CBs’ ratings.
In addition, all else unchanged, the ratings of the CBs would be downgraded if any of the following occurs: (1) the LSF assessment associated with the Programme were downgraded; (2) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (3) the relative amortisation profile of the OBG and CP were to move adversely; or (4) volatility in the financial markets were to cause the currently estimated market value spreads to increase.
BNP Paribas Securities Services SCA, Milan branch acts as the account bank for this transaction. Based on its private rating and on the replacement provisions included in the documentation, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with the “Legal Criteria for European Structured Finance Transactions” and “Rating and Monitoring Covered Bonds” methodologies.
Credit Suisse International is the CP swap counterparty; however, the swap documentation is not in line with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology. Therefore, no credit was given to swaps in DBRS Morningstar’s analysis.
The total outstanding amount of OBG is currently EUR 2.25 billion. As at 30 September 2019, the balance of the CP totalled EUR 3.1 billion of residential (95.8% of the loan balance) and commercial (4.2%) mortgages plus EUR 91 million of cash, resulting in total OC of 34.3%.
The CP comprised 47,029 mortgage loans originated by network banks that are part of the Banca Carige Group.
The weighted-average current loan-to-value ratio of the mortgages was 44.1% with an average seasoning of 8.1 years. The assets securing the loans in the CP were mainly distributed in the Italian regions of Liguria (40.0% of the loan balance), Tuscany (12.0%) and Lombardy (11.3%).
The CP comprised fixed-for-life loans (27.2% by outstanding balance) and floating-rate loans (72.8%). The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset at different dates.
In comparison, 44.5% of the liabilities pay a fixed rate and 55.5% pay a floating rate linked to three-month Euribor. The resulting interest and basis risks are considered as unhedged in DBRS Morningstar’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 7.5 years, whereas the WAL of the OBG, as of today, was 3.3 years, taking into account the expected maturities. The resulting asset-liability maturity mismatch is mitigated by the 15-month maturity extension in case of an Issuer event of default and by the OC.
DBRS Morningstar has assessed the LSF related to the Programme as “Adequate”, according to its “Rating European Covered Bonds” methodology. For more information, please refer to the DBRS Morningstar 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 and Monitoring Covered Bonds”.
DBRS Morningstar 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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for these ratings include historical performance data, loan-level and stratification information on the CP provided by the Issuer.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS Morningstar 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 23 November 2018, when DBRS Morningstar confirmed its BBB ratings on the series outstanding under the Programme.
Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
For further information on DBRS Morningstar 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 GmbH are subject to EU and US regulations only.
Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 November 2015
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DBRS Ratings GmbH
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Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
The rating methodologies used in the analysis of this transaction can be found at:
-- 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
-- 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 CLOs Backed by Loans to European SMEs
-- Rating CLOs and CDOs of Large Corporate Credit
-- Global Methodology for Rating Sovereign Governments
A description of how DBRS Morningstar 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.