DBRS Ratings GmbH (DBRS Morningstar) confirmed its BBB (high) ratings of 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). This rating action follows the completion of a full review of 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 530 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 Morningstar 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 34.2% 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 and interest rate stresses.
In accordance with DBRS Morningstar’s “Rating and Monitoring Covered Bonds” methodology, no forced asset liquidation has been considered for this transaction, given the conditional passthrough structure, and DBRS Morningstar 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 passthrough 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 Morningstar’s private ratings of such bank 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 its “Legal Criteria for European Structured Finance Transactions” methodology.
The total outstanding amount of OBG is currently EUR 530 million, while the aggregate balance of the CP, as at 31 March 2020, was EUR 758 million of residential mortgages plus EUR 11 million of cash collections, resulting in a total OC of 39.2%.
As at March 2020, the CP comprised 9,106 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 52.1% with an average seasoning of 3.5 years. The assets securing the loans in the CP are located mainly in Liguria (33.3%), Lombardy (18.7%), and Tuscany (11.7%).
The CP comprised fixed-for-life loans (76.3% by outstanding balance) and floating-rate loans (23.7%). 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 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 about 9.4 years, whereas the WAL of the OBG is 2.2 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 Morningstar has assessed the LSF related to the Programme as “Adequate”, according to its rating methodology. For more information, please refer to the DBRS Morningstar commentary “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework” on www.dbrsmorningstar.com.
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many structured finance transactions, some meaningfully. The rating is based on additional analysis and, where appropriate, additional adjustments to expected performance as a result of the global efforts to contain the spread of the COVID-19.
On 16 April 2020, DBRS Morningstar’s Sovereign group published its outlook on the impact to key economic indicators for the 2020-22 time frame. For details see the following commentaries: https://www.dbrsmorningstar.com/research/359679/global-macroeconomic-scenarios-implications-for-credit-ratings and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.
On 24 April 2020, DBRS Morningstar published a commentary outlining how the COVID-19 crisis is likely to affect the ratings of DBRS Morningstar-rated CB transactions in Europe. For more details, please see https://www.dbrsmorningstar.com/research/359987/covid-19-the-impact-on-european-covered-bonds.
For more information regarding rating methodologies and COVID-19, please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and COVID-19, please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is “Rating and Monitoring Covered Bonds” (27 April 2020).
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 at: http://www.dbrsmorningstar.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.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for these ratings include historical performance data (static pool default and recovery data; dynamic pool delinquency and prepayments data from 2005 to 2019), loan-level and stratification information on the CP as at 31 March 2020 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 not 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.
This is the first rating action since the Initial Rating Date.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.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: Ketan Thaker, Managing Director
Initial Rating Date: 21 May 2019
DBRS Ratings GmbH, Sucursal en España
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Tel. +49 (69) 8088 3500
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.
-- Rating and Monitoring Covered Bonds (27 April 2020),
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (27 April 2020),
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (10 December 2019) and European RMBS Credit Model v. 220.127.116.11, https://www.dbrsmorningstar.com/research/354403/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
-- Global Methodology for Rating Banks and Banking Organisations (11 June 2019),
-- Global Methodology for Rating Sovereign Governments (17 September 2019), https://www.dbrsmorningstar.com/research/350410/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.dbrsmorningstar.com/research/278375.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.