DBRS Confirms Ratings of Series Outstanding under Banco BPM Covered Bonds (OBG - Mortgages - Popolare Programme 1)

DBRS Ratings Limited (DBRS) has today confirmed the ratings of “A” on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) outstanding under the Banco BPM Covered Bonds Programme (OBG - Mortgages - Popolare Programme 1) (Banco BPM OBG1 or the Programme). The rating actions follow the completion of a full review of the Programme.

There are seven series of covered bonds outstanding under the Programme, for a total amount of EUR 6.65 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) set at BBB (high), being the Long-Term Critical Obligations Rating (COR) of Banco BPM. Banco BPM is the Issuer and Reference Entity (RE) for the Programme. DBRS does not classify Italy as a jurisdiction in which covered bonds are a particularly important funding instrument; however, DBRS deems the cover assets strategic for the core activity of the Issuer.
-- A Legal and Structuring Framework (LSF) Assessment of Adequate associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) floored at BBB (high).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 16.6% to which DBRS gives credit, being the minimum observed OC level during the past 12 months, adjusted by a scaling factor of 0.9. DBRS gives limited credit to the cash accumulating on the account bank as explained below.

The transaction was modelled with DBRS’s European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets, and interest rate stresses.

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 the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects.

Banco BPM acts as transaction account bank. The replacement trigger on Banco BPM in its capacity as account bank is not fully compliant with DBRS’s counterparty criteria; hence, DBRS gives limited credit to the cash accumulating with the account bank in accordance with the “Rating European Covered Bonds” methodology.

Credit Suisse International is the Cover Pool Swap counterparty and UBS Limited, Credit Suisse International, BBVA, Natixis and HSBC act as the Covered Bonds Swap counterparty; however, the swap documentation does not incorporate DBRS's language. As such, no credit was given to swaps in DBRS’s analysis.

As of the end of December 2016, the cover pool (CP) included EUR 9.8 billion of first economic-ranking residential mortgage loans, all originated by Banco Popolare and network banks of the group, and EUR 1 billion of cash. There are seven series outstanding for a total of EUR 6.65 billion. The current available OC is 53.5%.

The weighted-average (WA) current loan-to-value of the mortgages was 47.6%, with a seasoning of 6.2 years. The CP was distributed among Northern Italy (69.8% by outstanding balance, with 28.2% in Lombardy), Central Italy (21.7%) and Southern Italy (8.5%).

As of the end of December 2016, the CP comprised fixed-rate loans (25.6% by outstanding balance) and floating-rate loans (74.4%). The floating-rate mortgage loans are indexed to different plain vanilla bases and reset at different dates.

As of the cut-off date, the WA life of the cover pool was about 9.7 years, based on a 0% prepayment rate, which is longer than the current 1.9 years’ WA life on the OBG when taking into account the expected maturity. This risk is partially mitigated by the 12-month maturity extension in case of an Issuer event of default and by the OC.

DBRS has assessed the LSF related to the Programme as Adequate according to its rating methodology. The Adequate LSF Assessment associated with the Programme reflects DBRS’s view on: (1) the satisfactory level of segregation provided by the OBG legal framework and the covered bondholders’ first-priority right on the CP, in combination with appropriate contractual mitigants in relation to set-off, commingling and clawback risk; (2) the composition of the CP being 100% prime residential mortgage loans to borrowers concentrated in a BBB (high) Domicile Sovereign, combined with a contractual provision to automatically extend each and all CB maturities by 12 months upon an event of default of the Issuer while a firesale of the CP is triggered immediately following such event of default; (3) a contractual dynamic liquidity reserve set on each quarterly payment date prior to an Issuer event of default to a level sufficient to cover CB interests (or swap payments if the series is swapped) and senior costs accruing during the subsequent quarter; and (4) the role of the Bank of Italy in the supervision of the Italian OBG, combined with the good penetration of the OBG as a funding tool for Italian banks and an asset monitor that only indirectly reports to the regulator.

For more information, please refer to DBRS’s “Italian Covered Bonds: Legal and Structuring Framework Review” commentary, available at www.dbrs.com.

All CP assets are denominated in euros, as are the OBG. As such, investors are not currently exposed to any foreign exchange risk.

For further information on the Programme, please refer to the rating report that is available on www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Covered Bonds.”

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 legal 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. These 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 data and information used for this rating include historical default performance data, loan-by-loan level information and stratification tables on the cover pool provided by the Issuer.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

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

The last rating action under the Programme took place on 4 April 2016, when DBRS confirmed the ratings of the covered bonds outstanding under the programme, following a postponement of Series 7’s Maturity Date and Extended Maturity Date.

The lead analyst responsibilities for the Programme have been transferred to Antonio Laudani.

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

For further information on DBRS 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.

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

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President

Initial Rating Date of the Programme: 15 February 2016.

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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)
-- Global Methodology for Rating Banks and Banking Organisations
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- 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
-- Unified Interest Rate Model Methodology for European Securitisations
-- The Effect of Sovereign Risk on Securitisations in the Euro Area

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.