DBRS Ratings GmbH (DBRS Morningstar) downgraded its ratings on the Obbligazioni Bancarie Garantite (OBG or the Italian legislative covered bonds) issued under the Intesa Sanpaolo SpA (ISP or the Issuer) EUR 55 billion covered bond programme (ISP OBG or the programme) guaranteed by ISP OBG S.r.l. to “A” from A (high).
The downgrade follows DBRS Morningstar’s annual review and was prompted by a sharp increase in interest rates, which pushed the overcollateralisation (OC) level required to grant one notch of uplift on the covered bonds attachment point (CBAP) above the OC to which DBRS Morningstar gives credit.
The “A” ratings reflect the following analytical considerations:
-- A CBAP of “A”, which is ISP’s Long Term Critical Obligations Rating. ISP is the Issuer and reference entity (RE) for the programme. DBRS Morningstar classifies the Republic of 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” assigned to the programme.
-- An LSF-Implied Likelihood (LSF-L) of “A”.
-- No uplift for recovery prospects.
-- A level of OC to which DBRS Morningstar gives credit of 13.20%. This is the minimum OC observed over the past 12 months adjusted by a scaling factor of 0.9. The Issuer commits to an asset percentage of 94.5%, which translates to an OC commitment of 5.82%.
-- DBRS Morningstar’s sovereign rating of BBB (high) with a Stable trend on the Republic of Italy 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.
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 ratings.
There are currently 29 series outstanding for a total amount of EUR 45.86 billion. As of September 2022, the aggregate balance of the assets in the CP was EUR 54.41 billion, comprising EUR 49.9 billion of residential and commercial mortgages (defaulted loans included) and EUR 5.32 billion of cash collections (considering the principal component and reserve fund required amount), resulting in an estimated OC of 18.64%.
As of September 2022, the CP comprised 606,089 loans with a split of 89.9% residential versus 10.1% nonresidential, based on the type of property as defined in the Ministry of Finance Decree 12/2006 n.310. The CP has a weighted-average (WA) indexed current loan-to-value ratio of 48.76% and a WA seasoning of 6.9 years. The mortgages were originated by ISP and network banks that are part of the ISP group. The CP is geographically diversified, with the highest concentrations in the Italian regions of Lombardy (22.3% by outstanding loan balance), Veneto (12.5%), and Lazio (10.6%).
The CP comprised fixed-rate (71.3% of the total outstanding balance) and floating-rate loans (28.7% of the total outstanding balance). The floating-rate mortgage loans are indexed to different plain-vanilla bases and reset at different dates while the 100.0% floating-rate liabilities are linked to three-month Euribor plus a spread. The transaction is exposed to interest rate risk because, since February 2020, the transaction has not had any swap contracts in place.
All CP assets and OBG 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 9.1 years while the WA life of the OBG calculated as of the date of this press release is 7.4 years, based on the expected maturity. This generates an asset/liability mismatch, which is partially mitigated by the 12-month maturity extension in case of an Issuer event of default and by the OC in place. DBRS Morningstar assessed the LSF related to the ISP OBG as “Adequate” according to its rating methodology. For more information, please refer to the “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework” commentary available at www.dbrsmorningstar.com.
For further information on the programme, please refer to the rating report at https://www.dbrsmorningstar.com/issuers/19818.
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 (17 May 2022).
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/401817/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 static default data, investor reports, and loan-by-loan data on the CP provided by the Issuer as of 30 June 2022 that allowed DBRS Morningstar to further assess the portfolio.
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 29 September 2022, when DBRS Morningstar assigned an A (high) rating to Series 47 of the ISP OBG.
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.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 7 November 2014
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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 (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/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 (29 September 2022), https://www.dbrsmorningstar.com/research/403237/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 (29 August 2022), https://www.dbrsmorningstar.com/research/401817/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.