DBRS Ratings GmbH (DBRS Morningstar) confirmed its “A” ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banco BPM Covered Bonds Programme 1 (Banco BPM OBG1 or the Programme). The rating action follows the completion of a full review of the Programme.
As of today, there were five outstanding series of OBG, for a total nominal amount of EUR 3.25 billion under the Programme. The series are guaranteed by BP Covered Bond S.r.l.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (high), which is the Long-Term Critical Obligations Rating (COR) of Banco BPM. Banco BPM is the Issuer and Reference Entity (RE) for the Programme. DBRS Morningstar classifies Italy as a jurisdiction in which covered bonds (CB) 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 “Adequate” associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) of BBB (high).
-- A two-notch uplift for high recovery prospects.
---A level of overcollateralisation (OC) of 10.0% to which DBRS Morningstar gives credit, being the minimum observed OC level during the past 12 months, adjusted by a scaling factor of 0.9. DBRS Morningstar gives limited credit to the cash portion of the CP.
-- 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 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 covered bonds ratings.
In addition, all else unchanged, the CB ratings would be downgraded if the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.
Banco BPM acts as the account bank for this transaction. The replacement trigger on Banco BPM in its capacity as account bank is not fully compliant with DBRS Morningstar’s counterparty criteria; hence, DBRS Morningstar gives limited credit to the cash accumulating in the account bank in accordance with its “Rating and Monitoring Covered Bonds” methodology.
UBS Europe SE acts as the CB swap counterparty; however, the swap documentation is not fully compliant with DBRS Morningstar’s derivatives criteria. As such, no credit was given to swap transactions in DBRS Morningstar’s analysis.
The total outstanding amount of OBG is EUR 3.25 billion. As at 30 November 2021, the aggregate balance of the CP was EUR 3.5 billion of residential mortgages plus EUR 457 million of cash collections, resulting in a total OC of 20.8%. However, when considering the reduced credit DBRS Morningstar gives to cash, the resulting net OC amounts to 12.4%.
As at November 2021, the CP comprised 51,344 loans secured by first-rank mortgages, originated by the former Banco Popolare SC and network banks of the former group, considering the merger on January 2nd 2017 between Banca Popolare di Milano and Banco Popolare SC.
The weighted-average current loan-to-value ratio of the mortgages was 47.8% with a seasoning of 10.4 years. The CP was mainly distributed in Lombardy (29.3%), Veneto (13.4%), Emilia Romagna (11.3%), and Tuscany (11.0%).
The CP comprised 26.6% fixed-for-life loans by outstanding balance and 73.4% floating-rate loans. The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset at different dates.
In comparison, 38.5% of the liabilities pay a fixed rate and 61.5% pay a floating rate linked to one- and three-month Euribor plus a spread. The resulting interest and basis risks are considered as unhedged 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 7.6 years, whereas the WAL of the OBG is 1.7 years. The resulting asset-liability maturity mismatch is mitigated by the 12-month maturity extension in case of an Issuer event of default 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” at 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.
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: http://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 limited to the amendment agreement regarding a postponement of the maturity of Series 12, executed in April 2021.
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”
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 2012 to 2021 for the residential pool; static pool delinquency data from 2013 to 2021 and dynamic pool prepayments data from 2012 to 2021), stratification information on the CP as at 30 November 2021 and loan-level information on the CP as at 31 December 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 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 12 February 2021, when DBRS Morningstar confirmed its “A” ratings on the outstanding CB series.
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: 15 February 2016
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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 (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. 22.214.171.124,
-- European RMBS Insight: Italian Addendum (10 December 2021),
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021), https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- 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: 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.