DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Monte dei Paschi di Siena SpA (BMPS or the Issuer) EUR 20.0 billion covered bond programme (BMPS OBG1 or the Programme) guaranteed by MPS Covered Bond S.r.l. The rating action follows the completion of a full review of the Programme.
As of the date of this press release, there were 13 outstanding series of OBG under the Programme, totalling a nominal amount of EUR 8.2 billion.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (low), which is the Long Term Critical Obligations Rating of BMPS. BMPS is the Issuer and Reference Entity for the Programme. DBRS Morningstar classifies the Republic of Italy as a jurisdiction in which covered bonds 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 “Very Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A, which is the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- A LSF-L of A (high).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A level of overcollateralisation (OC) of 38.2% to which DBRS Morningstar gives credit. It is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.85, and an issuer-committed asset percentage of 81.0%, corresponding to a level of committed OC of 23.5%.
-- 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 with 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 the DBRS Morningstar “Rating and Monitoring Covered Bonds” methodology, DBRS Morningstar did not analyse any forced asset liquidations for this transaction, given the conditional pass-through structure. DBRS Morningstar assumed several prepayment scenarios, ranging between a 1% and a 20% prepayment rate.
Everything else being equal, a one-notch downgrade of the CBAP would lead to a two-notch downgrade of the covered bonds rating. In addition, DBRS Morningstar would downgrade the ratings if any of the following occurred: (1) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (2) the LSF Assessment associated with the Programme was downgraded to Strong or below; or (3) the CPCA was downgraded below “A”.
BMPS OBG1 has a conditional pass-through structure. If the guarantee is enforced, the Guarantor is not contractually bound to pursue a forced asset sale of the CP in a distressed market environment. Notwithstanding this, the Guarantor can still attempt to liquidate the assets with a view to meeting its payment obligations on the pass-through series and on the earliest maturing covered bonds. In so doing, the Guarantor shall attempt to maintain the Programme’s OC proportionally to all asset sales. Additionally, the Programme documentation provides for the sale of the assets to take place only as long as the Amortisation Test (which sets the OC to a level of at least 75% of the OC resulting from the Asset Percentage used on the last Test Calculation Date preceding the service of a Guarantee Enforcement Notice) is complied with before and after the sale. Should the Amortisation Test be breached, all series switch to pass-through payment on a pari passu and pro rata basis. DBRS Morningstar did not account for stresses on forced asset sales in its analysis because the Guarantor is not obliged to liquidate the assets.
The Bank of New York Mellon SA/NV - Milan Branch (rated AA (high) with a Stable Trend by DBRS Morningstar) and The Bank of New York Mellon SA/NV - London Branch (rated AA (high) with a Stable Trend by DBRS Morningstar) have replaced BMPS in its capacity as the Italian and English account banks, respectively. DBRS Morningstar considers the risk arising from the exposure to these entities to be consistent with the ratings assigned to the OBG, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology. Commingling and set-off risk are mitigated by the computation of such risks in the asset coverage tests.
As of June 2022, the total CP balance was EUR 12.5 billion, including EUR 12.4 billion of mortgages and EUR 113.1 million of principal receipts. There are currently EUR 8.2 billion of covered bonds outstanding under BMPS OBG1 for a total OC of 52.3%, net of commingling and set-off amounts.
As of June 2022, the mortgage CP comprised 156,174 mortgages backed by residential properties located in Italy. All mortgages were originated by either BMPS or affiliated groups. A small portion of the loans in the pool, 6.5% by loan balance, was granted to individuals not classified as SAE 600 (consumer families) by the Bank of Italy. DBRS Morningstar received separate default data for these borrowers and calculated a stressed default rate.
As of June 2022, the weighted-average (WA) unindexed current loan-to-value of the mortgages was 50.3% with a WA seasoning of 7.2 years. The CP is well distributed across Italy with the highest concentrations in Tuscany (20.9% by outstanding loan balance), Lazio (15.4%), and Lombardy (14.3%).
The CP comprises fixed-rate loans (46.7% by outstanding balance), floating-rate loans (51.5% by outstanding balance), and loans that have the option to switch to either a floating or fixed rate (1.7% by outstanding balance). The floating-rate mortgages are indexed to different plain vanilla bases and reset at different dates. Approximately 57.3% of OBG notional pays a fixed-rate coupon until the expected maturity, and if the maturity is extended, the relevant series becomes a pass-through series paying a floating rate plus a spread on a quarterly basis. DBRS Morningstar considered interest rate risk mismatch in its cash flow analysis.
All CP assets and OBGs are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.
As of 30 June 2022, the WA life of the CP was 9.8 years, which is longer than the 3.0 years WA life on the OBG (calculated as of the date of this press release) when accounting for the expected maturity. This risk is mitigated by the long extendable maturity date, which falls 38 years after the maturity date.
DBRS Morningstar has assessed the LSF related to the BMPS OBG1 as “Very Strong” according to its rating methodology. For more information, please refer to the DBRS Morningstar commentary “Italian Covered Bonds Legal and Structuring Framework Review,” available at www.dbrsmorningstar.com.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit actions on BMPS are likely to have an impact on these credit ratings. ESG factors that have a significant impact on BMPS are discussed separately at https://www.dbrsmorningstar.com/issuers/18987.
DBRS Morningstar took into consideration some significant governance factors underlying the analysis for the RE’s rating, and considers them to be significant also for the covered bonds’ 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/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.
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 not conducted as the 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 these ratings include loan-by-loan data as of 31 May 2022, vintage data and stratification tables provided by the Issuer, and payments reports provided by Banca Finanziaria Internazionale S.p.A. DBRS Morningstar considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of 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 5 July 2022 when DBRS Morningstar assigned AA rating to Series 30 of the BMPS CB1 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: 3 June 2015
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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), https://www.dbrsmorningstar.com/research/395642/rating-and-monitoring-covered-bonds.
-- Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (22 April 2022), https://www.dbrsmorningstar.com/research/395643/rating-and-monitoring-covered-bonds-addendum-market-value-spreads.
-- Global Methodology for Rating Banks and Banking Organisations (23 June 2022), https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- 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.
-- 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.
-- European RMBS Insight Methodology (28 March 2022) and European RMBS Insight Model v126.96.36.199, https://www.dbrsmorningstar.com/research/394309/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (10 December 2021), https://www.dbrsmorningstar.com/research/389473/european-rmbs-insight-italian-addendum.
-- 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.