DBRS Morningstar Confirms Credit Ratings on Banca Monte dei Paschi di Siena S.p.A. Covered Bonds (OBG – Mortgages – Programme 2) at AA (low)

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (low) credit 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 2 S.r.l.. The action follows the completion of a full review of the Programme.

Concurrently, DBRS Morningstar discontinued its credit ratings on Series 33 IT0005349078, Series 34 IT0005384844, and Series 35 IT0005384851, which were repaid between October 2022 and May 2023.

As of the date of this press release, there were 11 series of OBG outstanding under the Programme for a total nominal amount of EUR 7.65 billion.

The credit 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 as a jurisdiction in which covered bonds (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 “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).
-- An LSF-L of “A”.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 27.6% to which DBRS Morningstar gives credit. BMPS commits to a maximum asset percentage of 77.0%, corresponding to a level of committed OC of 29.9%.
-- 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.

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 “Global Methodology for Rating and Monitoring Covered Bonds”, 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 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 credit rating by one notch.

In addition, the credit 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 below or (3) the CPCA was downgraded below A (low).

Following an Issuer default, the maturities of all OBG are extended to the Long Due for Payment Date (falling on 31 December 2057) 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 for one quarter and interest payments on the OBG for the subsequent six months rolling.

In July 2023, the Programme’s documentation was amended, with the postponement of Series 36’s expected maturity to July 2026 from July 2023 and with the appointment of Crédit Agricole Corporate and Investment Bank, Milan Branch (CACIB) as Additional Account Bank, where the mentioned cash reserve, previously held with BMPS, has been transferred.

The total CP balance included EUR 9.7 billion of mortgages as of June 2023 and EUR 1.5 billion of principal receipts (net of a reimbursement of the subordinated loan funded in July 2023 with cash collections). As of today, there were EUR 7.65 billion worth of covered bonds outstanding under BMPS OBG2, which results in a total OC of 46.0%.

As of June 2023, the mortgage CP comprised mortgages secured on residential properties (82.5% by outstanding loan balance) as well as commercial properties (17.5%). The CP comprises 94,770 mortgages with a weighted-average (WA) current loan-to-value ratio of 50.0%, based on unindexed property values. The pool is well seasoned, with a WA seasoning of 7.8 years. Geographically, the pool is also well diversified across Italy, with the three largest concentrations in the regions of Tuscany (24.1%), Lombardy (15.2%), and Lazio (12.5%).

The reference rates of the underlying loans were floating rate (44.6%), fixed rate (51.1%), and optional (4.3%), while 86.9% 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 2023, the WA life of the CP was 9.1 years, which is longer than the 3.2-year WA life on the OBG when taking into account the expected maturity. This risk is mitigated by the extension to the Long Due for Payment Date.

DBRS Morningstar has assessed the LSF related to the BMPS OBG2 Programme as “Very Strong”, according to its credit 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.

DBRS Morningstar’s credit ratings on the outstanding CB Series address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related interest payment amounts and the related principal amount.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on the Issuer are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the Issuer are discussed separately at https://www.dbrsmorningstar.com/issuers/18987.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is: Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023), https://www.dbrsmorningstar.com/research/413651/global-methodology-for-rating-and-monitoring-covered-bonds.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 focused on the amendment agreements for the postponement of Series 36’s expected maturity and for the appointment of CACIB as Additional Account Bank, executed in July 2023.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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.

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.

The sources of data and information used for these credit ratings include loan-by-loan data as of 30 April 2023, static pool default data spanning from 2003 to 2022 and stratification tables provided by the Issuer, and payments reports provided by 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 credit rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 5 August 2022, when DBRS Morningstar upgraded to AA (low) from “A” its ratings on the CB Series outstanding under the Programme.

Information regarding DBRS Morningstar credit 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://registers.esma.europa.eu/cerep-publication/. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These credit 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 September 2013

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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023),
https://www.dbrsmorningstar.com/research/413651/global-methodology-for-rating-and-monitoring-covered-bonds

-- Global Methodology for Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (8 May 2023), https://www.dbrsmorningstar.com/research/413652/global-methodology-for-rating-and-monitoring-covered-bonds-addendum-market-value-spreads

-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight model v 6.0.0.0,
https://www.dbrsmorningstar.com/research/411634/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 (7 February 2023), https://www.dbrsmorningstar.com/research/409498/rating-clos-and-cdos-of-large-corporate-credit

-- Rating CLOs Backed by Loans to European SMEs (10 June 2022) and DBRS Diversity Model v 2.6.0.1, https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes

-- Global Methodology for Rating Banks and Banking Organisations (22 June 2023), https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations

-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://www.dbrsmorningstar.com/research/416730/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 Servicers (15 September 2022),
https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers

-- 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

-- 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 (4 July 2023),
https://www.dbrsmorningstar.com/research/416784/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 info@dbrsmorningstar.com.