DBRS Ratings GmbH (DBRS Morningstar) placed its A (low) rating 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 (the Programme) Under Review with Positive Implications.
As of the date of this press release, there is one series of OBG, guaranteed by Carige Covered Bond 2 S.r.l., totalling an outstanding nominal amount of EUR 195 million under the Programme.
The rating reflects the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of B (high), which is the Long Term Critical Obligations Rating on 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 covered bonds (CBs) 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.
-- A Cover Pool Credit Assessment (CPCA) of AA (low), which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of BBB.
-- A two-notch uplift for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 32%, as expressed in the investor report, and the 91.0% OC to which DBRS Morningstar gives credit, equal to the minimum observed in the past 12 months, adjusted by a scaling factor of 0.90.
-- The sovereign rating on 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 and interest rate stresses. In accordance with DBRS Morningstar’s “Rating and Monitoring Covered Bonds” methodology, DBRS Morningstar did not consider any forced asset liquidation for this transaction, given the conditional pass-through structure, and assumed several prepayment scenarios.
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 rating.
In addition, all else unchanged, the CB rating would be downgraded if any of the following were to occur: (1) the CPCA were downgraded below AA (low); (2) the LSF Assessment associated with the Programme were downgraded; or (3) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.
This rating action follows DBRS Morningstar’s placement of its ratings on Carige Under Review with Positive Implications on 22 February 2022 at https://www.dbrsmorningstar.com/research/392689/dbrs-morningstar-places-carige-under-review-with-positive-implications-lt-issuer-rating-at-b-low.
If DBRS Morningstar resolves its Under Review status on Carige’s ratings with a rating upgrade, this could result in an upgrade of the Programme’s CBAP, which could also result in an upgrade of the CB rating.
Following an Issuer default, and if there are no sufficient funds to redeem in full any OBG series at the relevant maturity date, such a series becomes payable according to a pass-through structure, and its maturity is automatically extended up to the relevant extended maturity date.
Series 635, the only series currently outstanding under the Programme, has a maturity date extendable by 33 years.
BNP Paribas Securities Services SCA, London Branch acts as the transaction bank and cash reserve account bank. Based on DBRS Morningstar’s private rating on the bank and the replacement provisions included in the documentation, DBRS Morningstar considers the risk of such counterparty to be consistent with the rating assigned, in accordance with its “Legal Criteria for European Structured Finance Transactions” and “Rating and Monitoring Covered Bonds” methodologies.
The total outstanding amount of OBG is currently EUR 195 million while the aggregate balance of the CP, as at 31 December 2021, was EUR 363 million of commercial (86.9%) and residential (13.1%) mortgages plus EUR 55 million of cash collections, resulting in a total OC of 101.9%.
As of December 2021, the CP comprised 2,362 mortgage loans originated by network banks that are part of the Banca Carige Group. The weighted-average (WA) current loan-to-value ratio of the mortgages was 33.0% with an average seasoning of 6.9 years. The assets securing the loans in the CP are located mainly in Liguria (43.4%) and Tuscany (16.3%).
The CP comprised fixed-for-life loans (26.8% by outstanding balance) and floating-rate loans (73.2%). 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. The resulting interest and basis risks are not hedged. DBRS Morningstar has taken this into account 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 is 5.2 years whereas the WAL of the OBG is 0.7 years, taking into account the expected maturity. The resulting asset-liability maturity mismatch is mitigated by the 33-year maturity extension and by the OC.
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 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.
DBRS Morningstar considered some significant governance factors underlying the analysis for the RE’s rating, and deemed them to be significant for the CB rating, in that they may affect the CBAP of the 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.
DBRS Morningstar is undertaking a review and will remove the rating from this status as soon as it is appropriate.
A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.
This rating action is driven by an Under Review rating action on a credit to which the ratings of this transaction are sensitive to. In DBRS Morningstar’s opinion, the analysis does not warrant the application of the entire principal methodology and the analysis focused on the impact that the Reference Entity-related rating action could have on the ratings of this transaction.
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 this rating 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 information on the CP as at 30 September 2021 and stratification 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 rating, 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 purpose of providing this rating 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 November 2021, when DBRS Morningstar confirmed its A (low) rating on the Series 635 outstanding under the Programme.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.
This rating is Under Review with Positive Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.
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: 13 November 2017
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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), https://www.dbrsmorningstar.com/research/379983/rating-and-monitoring-covered-bonds.
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (10 June 2021), https://www.dbrsmorningstar.com/research/379985/rating-and-monitoring-covered-bonds-addendum-market-value-spreads.
-- Global Methodology for Rating Banks and Banking Organisations (19 July 2021), https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. .
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- European RMBS Insight Methodology (3 June 2021) and European RMBS Insight Model v. 220.127.116.11, https://www.dbrsmorningstar.com/research/379557/european-rmbs-insight-methodology.
-- 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.
-- Rating CLOs and CDOs of Large Corporate Credit (26 January 2022),
-- Rating CLOs Backed by Loans to European SMEs (28 June 2021) and DBRS Morningstar SME Diversity Model v. 18.104.22.168,
-- 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), https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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.