DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (low) 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 OBG1 or the Programme) guaranteed by MPS Covered Bond S.r.l. The action follows the completion of the full review of the Programme.
At the same time, DBRS Morningstar discontinued its rating on Series 23 as it repaid early on 3 January 2020.
As of today, there were 12 outstanding series of OBG under the Programme, totalling a nominal amount of EUR 8.2 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 the 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 Cover Pool Credit Assessment (CPCA) of A (low), which is the lowest CPCA in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of “A”.
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A level of overcollateralisation (OC) of 34.1% to which DBRS Morningstar gives credit and is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.85. BMPS commits to a maximum asset percentage of 83.0%, corresponding to a level of committed OC of 20.5%.
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 the DBRS Morningstar “Rating and Monitoring Covered Bonds” methodology, no forced asset liquidations were analysed for this transaction, given the conditional pass-through structure. DBRS Morningstar assumed several prepayment scenarios, ranging between a 1% and 20% prepayment rate.
Everything else being equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the covered bonds rating. In addition, the ratings would be downgraded if any of the following were to occur: (1) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects, (2) the LSF Assessment associated with the Programme were downgraded to “Average” or below or (3) the CPCA were downgraded below A (low).
BMPS OBG1 has a conditional pass-through structure. If the guarantee is enforced, the Guarantor is not contractually bound to pursue a forced asset sale of the CP in a distressed market environment. Notwithstanding this, the Guarantor can still attempt to liquidate the assets so it can meet its payment obligations on the pass-through series and the earliest maturing covered bonds. In so doing, the Guarantor shall attempt to maintain the Programme’s OC proportionally to all asset sales. Additionally, the Programme documentation provides for the sale of the assets to take place only as long as the amortisation test is complied with before and after the sale. The amortisation test sets the OC to a level of at least 75.0% of the OC resulting from the asset percentage used on the last test calculation date preceding the service of a guarantee enforcement notice. Should the amortisation test be breached, all series switch to pass-through payment on a pari passu and pro rata basis. DBRS Morningstar did not account for stresses on forced asset sales in its analysis because the Guarantor is not obliged to liquidate the assets.
The Bank of New York Mellon (Luxembourg) S.A., Milan branch (rated AA (high) with a Stable trend by DBRS Morningstar) and The Bank of New York Mellon, London branch (rated AA (high) with a Stable trend by DBRS Morningstar) have replaced BMPS in its capacity as the Italian and English account banks, respectively. They are compliant with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology. Commingling and set-off risk are mitigated by the computation of such risks in the asset coverage tests.
As of June 2020, the total CP balance was EUR 13.2 billion, including EUR 12.6 billion of mortgages and EUR 588.1 million of principal receipts. There are currently EUR 8.2 billion of covered bonds outstanding under BMPS OBG1 for a total OC of 56.8%, net of the commingling and set-off amounts.
As of June 2020, the mortgage CP comprised 154,690 mortgages backed by residential properties located in Italy. All mortgages were originated by either BMPS or affiliated groups. A small portion of the loans in the pool, 6.7% by loan balance, was granted to individuals not classified as SAE 600 (consumer families) by the Bank of Italy. DBRS Morningstar received separate default data for these borrowers and calculated a stressed default rate.
As of June 2020, the weighted-average (WA) unindexed current loan-to-value of the mortgages was 50.7% with a WA seasoning of 6.6 years. The CP is well distributed across Italy with the highest concentrations in Tuscany (19.5% by outstanding loan balance), Lazio (15.3%), and Lombardy (14.3%).
The CP comprises fixed-rate loans (35.1% by outstanding balance), floating-rate loans (62.7% by outstanding balance), and loans that have the option to switch to either a floating or fixed rate (2.2% by outstanding balance). The floating-rate mortgages are indexed to different plain vanilla bases and reset at different dates. Approximately 79% of OBG notional pays a fixed-rate coupon until the expected maturity, and if the maturity is extended, the relevant series becomes a pass-through series paying a floating rate plus a spread on a quarterly basis. DBRS Morningstar considered interest rate risk mismatch in its cash flow analysis.
All CP assets and OBGs are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.
As of 30 June 2020, the WA life of the CP was 10.0 years, which is longer than the 3.7 years WA life on the OBG (calculated as of today) when accounting for the expected maturity. This risk is mitigated by the long extendable maturity date, which falls 38 years after the maturity date.
DBRS Morningstar has assessed the LSF related to the BMPS OBG1 as “Very Strong” according to its rating methodology. For more information, please refer to the DBRS Morningstar commentary “Italian Covered Bonds 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 loan-by-loan data as of 30 June 2020, vintage data and stratification tables provided by the Issuer and payments reports provided by Securitisation Services. DBRS Morningstar considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS Morningstar does not rely upon third-party due diligence in order to conduct its analysis. At the time of initial rating, DBRS Morningstar was 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 8 October 2019, when DBRS Morningstar assigned an AA (low) rating to Series 27 of the BMPS CB1 programme.
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: 23 September 2015
DBRS Ratings GmbH, Sucursal en España
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Tel. +34 (91) 903 6500
DBRS Ratings GmbH
Neue Mainzer Straße 75
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.
-- 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.
-- 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.
-- 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.