DBRS Ratings GmbH (DBRS Morningstar) upgraded to AA (low) from “A” its 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 OBG2 or the Programme) guaranteed by MPS Covered Bond S.r.l. 2. The action follows the completion of a full review of the Programme.
Given the rating of BMPS, which is the account bank for this transaction, DBRS Morningstar also considered the minimum observed overcollateralisation (OC) levels over the last year, in conjunction with the committed OC. The upgrade is driven by increased levels in the observed minimum OC over the past 12 months. According to DBRS Morningstar’s “Rating and Monitoring Covered Bonds” methodology, when the rating of the bank account is not aligned with DBRS Morningstar’s legal criteria, limited credit is given to the cash in the calculation of the OC to which DBRS Morningstar gives credit. For BMPS CB2, the level of minimum observed OC after accounting for this limited credit to cash level, is now higher than previously observed. At the same time, DBRS Morningstar discontinued its rating on Series 32, which reached its final maturity on 29 June 2022.
As of the date of this press release, there were 14 series of OBG outstanding under the Programme for a total nominal amount of EUR 9.15 billion.
The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (low), which is BMPS’s Long Term Critical Obligations Rating. BMPS is the Issuer and Reference Entity for the Programme. DBRS Morningstar classifies the Republic of Italy (Italy; rated BBB (high) with a Negative trend by DBRS Morningstar) 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 (low), being the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- A LSF-Implied Likelihood (LSF-L) of “A”.
-- A two-notch uplift for high recovery prospects.
-- A level of OC of 16.0% to which DBRS Morningstar gives credit, which is the contractually committed OC level for BMPS CB2, together with the minimum OC observed over the last 12 months.
The transaction was analysed with DBRS Morningstar’s 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, no forced asset liquidation has been calculated for this transaction given the conditional pass-through structure. DBRS Morningstar has assumed several prepayment scenarios, ranging between a 1.0% and a 20.0% prepayment rate.
Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch.
In addition, the ratings of the Programme would be downgraded if any of the following were to occur: (1) The quality of the cover pool (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 “Adequate” or (3) the CPCA was downgraded to or below BBB (low).
Following an Issuer default, the maturities of all OBG are extended to the Long Due for Payment Date and cash flows from the CP are allocated to all series on a pro rata and pari passu basis and distributed to OBG holders via a modified pass-through mechanism. According to this mechanism, money is accumulated into an account opened by the guarantor with an eligible institution and paid out on the expected maturity date of each OBG. This implies a negative carry and has been taken into account in DBRS Morningstar’s cash flow analysis.
The OBG holders benefit from a reserve that is sufficient to cover senior costs and interest payments on the OBG for the subsequent six months rolling.
As of June 2022, the total CP balance was EUR 11.57 billion, including EUR 10.1 billion of mortgages and EUR 149 million of principal receipts. As of today, there were EUR 9.15 billion worth of covered bonds outstanding under BMPS OBG2, which results in a total OC of 26.4%.
As of June 2022, the mortgage CP comprised mortgages secured on residential properties (81.6% by outstanding loan balance) as well as commercial properties (18.4%). The CP comprises 106,083 mortgages with a weighted-average (WA) unindexed current loan-to-value ratio of 46.6%, based on unindexed property values. The pool is well seasoned, with a WA seasoning of 7.4 years. Geographically, the pool is also well diversified across Italy, with the three largest concentrations in the regions of Tuscany (23.8%), Lombardy (15.0%), and Lazio (12.7%).
The reference rates of the underlying loans were floating rate (49.2%), fixed rate (46.1%), and optional (4.7%), while 89.5% of the OBG outstanding pays a floating coupon. As there are no hedging agreements in place, OBG holders are exposed to interest rate mismatch, which has been taken into account in DBRS Morningstar’s cash flow analysis.
All CP assets and liabilities are denominated in euros. As such, investors are not currently exposed to any foreign exchange risk.
As of June 2022, the WA life of the CP was 9.2 years, which is longer than the 2.8-year WA life on the OBG when taking into account the expected maturity. This risk is mitigated by the Long Due for Payment Date, which falls on 31 December 2057.
DBRS Morningstar has assessed the LSF related to the BMPS OBG2 Programme as “Very Strong”, according to its rating methodology. For more information, please refer to the DBRS Morningstar commentaries, “DBRS Assigns LSF Assessment to Italian Covered Bonds” and “Italian Obbligazioni Bancarie Garantite: 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.
DBRS Morningstar analysed the transaction structure in Covered Bond Cash Flow Tool.
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 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 these ratings are BMPS and Banca Finanziaria Internazionale S.p.A.
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 13 June 2022 when DBRS Morningstar assigned a rating of “A” to Series 46 and discontinued its rating on Series 31, which reached its final maturity on 29 April 2022.
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 , Head of European RMBS and Covered Bonds
Initial Rating Date: 3 September 2013
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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 v188.8.131.52, 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.
-- Rating CLOs and CDOs of Large Corporate Credit (26 January 2022), https://www.dbrsmorningstar.com/research/391226/rating-clos-and-cdos-of-large-corporate-credit.
-- Rating CLOs Backed by Loans to European SMEs (10 June 2022) and DBRS Diversity Model v184.108.40.206, https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes.
-- 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 firstname.lastname@example.org.