Press Release

DBRS Morningstar Assigns AA (low) Rating to Series 19 of Banca Nazionale del Lavoro S.p.A. Covered Bonds (OBG - Mortgages)

Covered Bonds

January 28, 2022

DBRS Ratings GmbH (DBRS Morningstar) assigned a AA (low) rating to the Series 19 (ISIN IT0005481939) Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Nazionale del Lavoro S.p.A. Covered Bonds Programme (the Programme).

Concurrently, DBRS Morningstar discontinued its rating on Series 15 (ISIN IT0005398380), which was repaid on 28 January 2022.

As of the date of this rating action, there were six series of OBG under the Programme, totalling an outstanding nominal amount of EUR 11.7 billion. The series are guaranteed by Vela OBG S.r.l. All covered bonds issued under the Programme rank pari passu with each other and are currently rated AA (low) by DBRS Morningstar.

The ratings reflect the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of AA (low). Banca Nazionale del Lavoro S.p.A. (BNL) is the Issuer and the reference entity (RE) for the programme. There is no Critical Obligations Rating associated with the RE, but DBRS Morningstar classifies Italy as a jurisdiction for which covered bonds (CB) are a particularly important financing tool.
-- A Legal and Structuring Framework (LSF) Assessment of “Modest” associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) of AA (low).
-- No uplift for recovery prospects.
-- A level of overcollateralisation (OC) of 4.9% to which DBRS Morningstar gives credit, which is the minimum observed OC level over the past 12 months adjusted by a scaling factor of 0.85.
-- The sovereign rating of the Republic of Italy, rated BBB (high) with a Stable trend by DBRS Morningstar, as of the date of this rating action.

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, and interest rate stresses.

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.

BNL acts as the account bank for this transaction. Based on its 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 its “Legal Criteria for European Structured Finance Transactions” and “Rating and Monitoring Covered Bonds” methodologies.

BNL also acts as the cover pool (CP) swap counterparty; however, the swap documentation is not in line with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology. Therefore, DBRS Morningstar did not give credit to swaps in its analysis.

The total outstanding amount of OBG is currently EUR 11.7 billion. As at 30 September 2021, the CP was composed of EUR 13.7 billion of residential (91.6% of the loan balance), commercial (7.5%), and public sector (0.9%) mortgages plus EUR 573 million of cash, resulting in a total OC of 19.4%.

The weighted-average (WA) current loan-to-value ratio of the mortgages was 47.1% with an average seasoning of 4.7 years as at 30 September 2021. The assets securing the loans in the CP were mainly distributed in the Italian regions of Lazio (22.3% of the loan balance) and Lombardy (14.6%).

The CP comprised fixed-for-life loans (82.3% by outstanding balance) and floating-rate loans (17.7%). 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. DBRS Morningstar considered the resulting interest and basis risks as unhedged in its 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 was 8.8 years as at 30 September 2021 whereas the WAL of the OBG, as of the date of this rating action, was 1.6 years, taking into account the expected maturities. The resulting asset-liability maturity mismatch is mitigated by the OC.

DBRS Morningstar has assessed the LSF related to the Programme as “Modest”, according to its “Rating and Monitoring Covered Bonds” methodology. For more information, please refer to the DBRS Morningstar commentary “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework” at 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 CPs. The ratings are based on additional analysis 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 9 December 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/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

ESG CONSIDERATIONS
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.

Notes:
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 change under consideration does 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 final terms of Series 19.

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 data from 2009 to 2021 for the residential pool and from 2000 to 2021 for the commercial pool; dynamic pool delinquency data from 2012 to 2021, and prepayments data from 2010 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 ratings, 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.

The last rating action on this transaction took place on 16 December 2021, when DBRS Morningstar confirmed its AA (low) 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: http://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: 16 December 2019

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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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