DBRS Ratings GmbH (DBRS Morningstar) placed its BBB (high) ratings of the obbligazioni bancarie garantite (OBG; the Italian legislative covered bonds) issued under the EUR 3,000,000,000 Banca Carige S.p.A. Covered Bonds Programme (the Programme) Under Review with Positive Implications.
As of today, there were two series of OBG, guaranteed by Carige Covered Bond S.r.l., totalling an outstanding nominal amount of EUR 485 million under the Programme.
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 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 BBB (low), which is the lowest CPCA in line with the assigned 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 20.5%, as expressed in the investor report, and the 40.1% OC to which DBRS Morningstar gives credit, equal to the minimum level observed in the last 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 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 passthrough structure, and assumed several prepayment scenarios.
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 CB ratings.
In addition, all else unchanged, the CB ratings would be downgraded if any of the following were to occur: (1) the CPCA were downgraded below BBB (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 ratings.
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 passthrough structure, and its maturity is automatically extended up to the relevant extended maturity date.
The series currently outstanding under the Programme have a maturity date extendable by 38 years.
BNP Paribas Securities Services SCA, Milan Branch acts as the transaction bank and cash reserve account bank. Based on DBRS Morningstar’s private ratings on such bank 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” methodology.
The total outstanding amount of OBG is currently EUR 485 million while the aggregate balance of the CP, as at 31 December 2021, was EUR 707 million of residential mortgages plus EUR 29 million of cash collections, resulting in a total OC of 45.8%.
As at December 2021, the CP comprised 9,240 mortgage loans originated by Banca Carige and Banca del Monte di Lucca, which is part of the Carige Group. The weighted-average (WA) current loan-to-value ratio of the mortgages was 49.9% with an average seasoning of 4.4 years. The assets securing the loans in the CP are located mainly in Liguria (35.6%), Lombardy (17.9%), and Tuscany (11.0%).
The CP comprised fixed-for-life loans (80.0% by outstanding balance) and floating-rate loans (20.0%). 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 8.8 years whereas the WAL of the OBG is currently 0.5 years, taking into account the expected maturity. The resulting asset-liability maturity mismatch is mitigated by the 38-year maturity extension 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” on 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 significant for the CBs’ 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.
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 these ratings include historical performance data (static pool default and recovery data from 2006 to 2020; dynamic pool delinquency and prepayments data from 2005 to 2020) as well as loan-level information on the CP as at 31 March 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 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 21 May 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.
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: 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.
This rating is 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: 21 May 2019
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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), https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. .
-- Legal Criteria for European Structured Finance Transactions (29 July 2021),
-- European RMBS Insight Methodology (3 June 2021) and European RMBS Insight Model v. 126.96.36.199,
-- 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),
-- 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: 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.