DBRS Confirms “A” Ratings on Unione di Banche Italiane S.p.A. Covered Bonds (OBG - Mortgages - Programme 2)

DBRS Ratings Limited (DBRS) has today confirmed the “A” ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Unione di Banche Italiane S.p.A. Covered Bonds Programme 2 (UBI OBG2, or the Programme) guaranteed by UBI Finance CB2 S.r.l. The rating action follows the completion of a full review of the Programme.

As of today, there are five series of OBG with an aggregate nominal amount of EUR 2.37 billion outstanding under the Programme.

The ratings are based on the following analytical considerations:

-- A Covered Bonds Attachment Point of “A”, being the Long-Term Critical Obligations Rating (COR) of Unione di Banche Italiane S.p.A. (UBI). UBI is the Issuer and Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) floored at A.
-- No recovery uplift.
-- No committed overcollateralisation (OC), and a limited level of OC that DBRS considers sustainable based on discussions with the issuer and expected market developments.

The transaction was modelled using the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults, recoveries of the assets, interest rate stresses and market value spreads to calculate the liquidation values of the cover pool (CP).

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.

BNP Paribas Securities Services, London Branch, acts as English account bank and qualifies as an eligible institution in accordance with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology. No swaps are contemplated under the Programme.

The total outstanding amount of OBG is currently EUR 2.37 billion, while the aggregate balance of loans (as of August 2016) in the CP is EUR 3.24 billion of residential (41%) and commercial (59%) mortgages plus EUR 124 million of cash, resulting in a total OC of 41.9%.

As of August 2016, the CP comprised 27,909 mortgage loans originated by network banks that are part of the UBI group.

The weighted-average current loan-to-value of the mortgages was 37.9% with an average seasoning of seven years. The asset securing the loan in the CP were located predominantly in Lombardy (46.9%), Piedmont (10.9%) and Lazio (7%).

The CP comprised 89.8% floating-rate mortgage loans, indexed to different plain vanilla bases and that reset at different dates. This compares to 100% of the liabilities paying a floating rate linked to Euribor plus a spread. The resulting interest and basis risks are unhedged. This has been considered in DBRS’s cash flow modelling.

All CP assets and OBG are denominated in euros. As such, investors are currently not exposed to currency risk.

The weighted-average life of the cover pool is six years based on a 0% pre-payment rate, which is longer than the four years weighted-average life on the OBG, taking into account the expected maturity. This maturity-mismatch risk is partially mitigated by the 12-month maturity extension in case of an Issuer event of default, and by the uncommitted overcollateralisation.

DBRS has applied its updated European SME CLO rating methodology, published on 19 July 2016, to perform the analysis of the non-residential portion of the pool. For further information, please see “Rating CLOs Backed by Loans to European SMEs”.

DBRS has assessed the LSF related to the UBI OBG2 as “Average” according to its rating methodology. For more information, please refer to DBRS’s “DBRS Assigns LSF Assessment to Italian Covered Bonds” and “Italian Covered Bonds Legal and Structuring Framework Review” commentaries, both available at www.dbrs.com.

The A (low) Long-Term Issuer Rating of the Republic of Italy was placed Under Review with Negative Implications on 5 August 2016. Given that the current rating of the Programme is the same level as the COR of the Issuer, DBRS expects no impact on the ratings should the sovereign be downgraded to BBB (high).

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating European Covered Bonds (July 2016). This can be found on www.dbrs.com at http://www.dbrs.com/about/methodologies.

DBRS 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.

Other methodologies referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include historical performance data, loan-by-loan level and stratification information on the CP provided by the Issuer. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis. DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating action on this transaction took place on 24 June 2016, when DBRS assigned an “A” rating to Series 5 and confirmed the “A” ratings on the other OBG outstanding under the Programme.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

For further information on DBRS historic 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.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Vito Natale
Initial Rating Date: 27 October 2015
Initial Rating Committee Chair: Quincy Tang

Lead Surveillance Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Senior Vice President

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Critical Obligations Rating Criteria
-- Global Methodology for Rating Banks and Banking Organisations
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating CLOs and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European SMEs
-- The Effect of Sovereign Risk on Securitisations in the Euro Area
-- Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.