DBRS Ratings GmbH (DBRS Morningstar) confirmed its BBB (high) ratings on 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 execution of amendments (the Amendments) to the swap agreements entered into on the cover pool (CP) and on the covered bonds (CBs).
As of the date of this press release, there were 15 series of OBG under the Programme, totalling an outstanding nominal amount of EUR 1.7 billion. The series are guaranteed by Carige Covered Bond S.r.l.
The ratings reflect the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of B (high), which is the Long Term Critical Obligations Rating of Banca Carige S.p.A. (Carige). Carige is the Issuer and Reference Entity (RE) for the Programme. DBRS Morningstar classifies Italy as a jurisdiction in which CBs 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 BBB (low), which is the lowest CPCA in line with the final 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 22%, as expressed in the investor report, and the 45.2% OC to which DBRS Morningstar gives credit, equal to the minimum level observed in the past 12 months, adjusted by a scaling factor of 0.93.
-- The sovereign rating of the Republic of Italy, rated BBB (high) with a Stable trend by DBRS Morningstar, as of the date of this press release.
DBRS Morningstar analysed the transaction using its 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 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 ratings on the CBs would be downgraded if any of the following occurred: (1) the CPCA was downgraded below BBB (low); (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 profiles of the OBG and CP were to move adversely; (4) the LSF assessment associated with the Programme was downgraded; or (5) volatility in the financial markets caused the currently estimated market value spreads to increase.
The Amendments, executed on 3 December 2021, consist in the early termination of the CP swap and the alignment of the CB swap documentation with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” (the Derivative Criteria).
The termination of the CP swap does not have any impact on the CB ratings as DBRS Morningstar has not considered this so far in its analysis since the relevant documentation was not in line with the Derivatives Criteria.
BNP Paribas Securities Services SCA, Milan branch acts as the account bank for this transaction. Based on DBRS Morningstar’s private rating on this bank and 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 CB swap counterparty; following the execution of the Amendments, the relevant documentation is aligned with the Derivative Criteria. Therefore, DBRS Morningstar has given credit to the CB swap agreements in its analysis.
The CB swaps currently hedge eight fixed-rate CB series for a total amount of EUR 382 million (22.6% of the current balance of liabilities). The swap counterparty (1) receives monthly floating amounts indexed to one-month Euribor and (2) pays annual fixed amounts equal to the coupon payable on the hedged CB series.
The total outstanding amount of OBG is currently EUR 1.7 billion. As at 31 October 2021, the balance of the CP totalled EUR 2.6 billion of residential loans (97.5% of the total pool balance) and commercial loans (2.5%) plus EUR 49 million of cash, resulting in a total OC of 51.7%.
The CP comprised 41,125 mortgage loans originated by network banks that are part of the Banca Carige Group.
As of 30 October 2021, the weighted-average current loan-to-value ratio of the mortgages was 44.5% with an average seasoning of 8.2 years. The assets securing the loans in the CP were mainly distributed in the Italian regions of Liguria (39.9% of the loan balance), Tuscany (12.0%), and Lombardy (11.0%).
The CP comprised fixed-for-life loans (40.9% by outstanding balance) and floating-rate loans (59.1%). The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset at different dates.
In comparison, 70.4% of the liabilities pay a fixed rate and 29.6% pay a floating rate linked to three-month Euribor. The resulting interest rate and basis risk are partly hedged through the CB swaps, considered 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 7.4 years whereas the WAL of the OBG, as of the date of this press release, was 5.5 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. Only Series 646 and 647 feature a 12-month maturity extension.
DBRS Morningstar 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”, which is available on https://www.dbrsmorningstar.com/.
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many cover pools. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar incorporated an increase in default probability of self-employed borrowers in its analysis of this Programme. In addition, DBRS Morningstar assumed a moderate decline in residential property prices.
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.
DBRS Morningstar took into consideration some significant governance factors underlying the analysis for the RE’s rating, and considers them to be significant also for the CB ratings, in that they may affect the CBAP of this Programme.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is “Rating and Monitoring Covered Bonds” (10 June 2021).
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.
In DBRS Morningstar’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS Morningstar focused on the cash flow analysis.
A review of the transaction legal documents was limited to the CB swap agreements and to the Amendments documentation.
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/381451/global-methodology-for-rating-sovereign-governments.
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.
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 2007 to 2021) as well as loan-level and stratification information on the CP as at 30 September 2021 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 19 November 2021, when DBRS Morningstar confirmed its BBB (high) ratings on the series outstanding under the 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 23 November 2015
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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 (10 June 2021),
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (10 June 2021),
-- Global Methodology for Rating Banks and Banking Organisations (19 July 2021),
-- Legal Criteria for European Structured Finance Transactions (29 July 2021),
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021),
-- European RMBS Insight Methodology (3 June 2021) and European RMBS Insight Model v. 184.108.40.206,
-- European RMBS Insight: Italian Addendum (21 December 2020),
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021),
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021),
-- Rating CLOs and CDOs of Large Corporate Credit (8 February 2021),
-- Rating CLOs Backed by Loans to European SMEs (28 June 2021) and DBRS Diversity Model v. 220.127.116.11,
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021),
-- Global Methodology for Rating Sovereign Governments (9 July 2021),
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021),
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://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.