DBRS Ratings GmbH (DBRS Morningstar) confirmed its “A” ratings of the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Monte dei Paschi di Siena SpA (BMPS or the Issuer) EUR 20.0 billion covered bond programme (BMPS OBG2 or the Programme) guaranteed by MPS Covered Bond S.r.l. 2. The action follows the completion of the full review of the Programme.
At the same time, DBRS Morningstar discontinued its ratings on Series 23 and 24, which reached their final maturity on 29 April 2020 and 29 July 2020, respectively.
As of today, there were 13 series of OBG outstanding under the Programme for a total nominal amount of EUR 6.85 billion.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (low), which is BMPS’s Long-Term Critical Obligations Rating. BMPS is the Issuer and Reference Entity for the Programme. DBRS Morningstar classifies the Republic of Italy (Italy; rated BBB (high) with a Negative trend by DBRS Morningstar) 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 28.7% to which DBRS Morningstar 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 Morningstar’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 Morningstar’s “Rating and Monitoring Covered Bonds” methodology, no forced asset liquidation has been calculated for this transaction given the conditional pass-through structure. DBRS Morningstar has assumed several prepayment scenarios, ranging between a 1.0% and a 20.0% 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 this mechanism, money is accumulated into an account opened by the guarantor with an eligible institution and paid out on the expected maturity date of each OBG. This implies a negative carry and has been taken into account in DBRS Morningstar’s cash flow analysis.
The Issuer performs several roles under the Programme documents. According to DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, a CBAP as low as BBB (low) is compatible, in DBRS Morningstar’s view, with the Issuer performing the role of account bank for the Programme in association with the “A” ratings on the OBG.
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 2020, the total CP balance was EUR 10.5 billion, including EUR 9.1 billion of mortgages and EUR 1.4 million of principal receipts. As of today, there were almost EUR 6.9 billion worth of covered bonds outstanding under BMPS OBG2, giving a total OC of 53.2%.
As of June 2020, the mortgage CP comprised mortgages secured on residential properties (75.9% by outstanding loan balance) as well as commercial properties (24.1%). The CP comprises 94,864 mortgages with a weighted-average (WA) unindexed current loan-to-value ratio of 42.7%, based on unindexed property values. The pool is well seasoned, with a WA seasoning of 8.0 years. Geographically, the pool is also well diversified across Italy, with the three largest concentrations in the regions of Tuscany (25.1%), Lazio (14.0%), and Lombardy (13.0%).
The reference rates of the underlying loans were floating rate (64.3%), fixed rate (29.2%), and optional (6.5%), 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 Morningstar’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 2020, the WA life of the CP was 8.5 years, which is longer than the 1.6-year WA life on the OBG when taking into account the expected maturity. This risk is mitigated by the Long Due for Payment Date, which falls on 31 December 2057.
DBRS Morningstar 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 Morningstar commentaries, “DBRS Assigns LSF Assessment to Italian Covered Bonds” and “Italian Obbligazioni Bancarie Garantite: Legal and Structuring Framework Review,” available at 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 payment holidays and delinquencies may arise in the coming months for many cover pools, some meaningfully. The ratings are based on additional analysis as a result of the global efforts to contain the spread of the coronavirus.
The DBRS Morningstar Sovereign group released on 16 April 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 22 July 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar’s analysis considered impacts consistent with the moderate scenario in the referenced reports.
On 24 April 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated Covered Bonds in Europe. For more details please see https://www.dbrsmorningstar.com/research/359987/covid-19-the-impact-on-european-covered-bonds and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.
For more information regarding rating methodologies and Coronavirus Disease (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 Coronavirus Disease (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). This can be found at https://www.dbrsmorningstar.com/about/methodologies.
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 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: https://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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-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 as of 30 May 2020 that allowed DBRS Morningstar to further assess the portfolio.
DBRS Morningstar considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis. At the time of initial rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.
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 12 February 2020, when DBRS Morningstar assigned “A” ratings to Series 36 and 37 of BMPS CB2.
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: 3 September 2013
DBRS Ratings GmbH, Sucursal en España
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Tel. +34 (91) 903 6500
DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
The rating methodologies used in the analysis of this transaction can be found at : https://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),
-- Global Methodology for Rating Banks and Banking Organisations (8 June 2020),
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
-- 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
-- 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.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 July 2020) and European RMBS Credit Model v 126.96.36.199, https://www.dbrsmorningstar.com/research/363998/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Rating CLOs and CDOs of Large Corporate Credit (21 July 2020),
-- Rating CLOs Backed by Loans to European SMEs (8 July 2019) and DBRS Diversity Model v188.8.131.52, https://www.dbrsmorningstar.com/research/347780/rating-clos-backed-by-loans-to-european-smes.
-- Global Methodology for Rating Sovereign Governments (27 July 2020), https://www.dbrsmorningstar.com/research/364527/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.dbrsmorningstar.com.
This press release was amended on 4 September 2020 to reflect the publication date of the principal methodology applicable to the ratings.