DBRS Ratings GmbH (DBRS Morningstar) upgraded its 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) to AAA from A (low) and removed the rating from Under Review with Positive Implications, where it was placed on 28 February 2022.
As of the date of this press release, there is one series of OBG, totalling an outstanding nominal amount of EUR 195 million under the Programme. The series is guaranteed by Carige Covered Bond 2 S.r.l.
The rating reflects the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (low), which is the Long Term Critical Obligations Rating on Banca Carige S.p.A. (Carige). Carige is the Issuer and Reference Entity 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 Issuer’s core activity.
-- A Legal and Structuring Framework (LSF) Assessment of “Adequate” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of AA, which is the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AA.
-- A two-notch uplift for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 32%, as expressed in the investor report, and the 49.3% OC to which DBRS Morningstar gives credit, equal to the minimum observed in the past 12 months, adjusted by a scaling factor of 0.85.
-- 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 two-notch downgrade of the LSF-L, resulting in a two-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 was downgraded below AA; (2) the LSF Assessment associated with the Programme was 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 28 July 2022 upgrade of the Issuer’s ratings and, in particular, the upgrade of its Long Term Critical Obligations Rating to A (low) from B (high).
Following an Issuer default, and if there are insufficient funds to fully redeem 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 30 June 2022 was EUR 287 million of commercial mortgages plus EUR 40 million of cash collections, resulting in a total OC of 58.0%. The CP includes a negligible portion of residential loans (0.2%).
As of 30 June 2022, the CP comprised 1,655 mortgage loans originated by network banks that are part of the Banca Carige Group. The weighted-average current loan-to-value ratio of the mortgages was 30.2% with an average seasoning of 7.5 years. The assets securing the loans in the CP are located mainly in Liguria (45.0%) and Tuscany (16.8%).
The CP comprised fixed-for-life loans (18.8% by outstanding balance) and floating-rate loans (81.2%). 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 4.7 years whereas the WAL of the OBG is 0.2 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.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is “Rating and Monitoring Covered Bonds” (22 April 2022).
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 a cash flow analysis.
A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.
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 30 June 2022 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 28 February 2022, when DBRS Morningstar placed its A (low) rating on the outstanding Series 635 under the Programme Under Review with Positive Implications.
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: 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 (22 April 2022),
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (22 April 2022),
-- Global Methodology for Rating Banks and Banking Organisations (23 June 2022),
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
-- 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 (10 June 2022) and DBRS Morningstar 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 (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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.