DBRS Confirms A (high) Ratings on BMPS CB1, Maintains Under Review – Negative Status

DBRS Ratings Limited (DBRS) has today confirmed the A (high) ratings of the Obbligazioni Bancarie Garantite (OBG, the Italian legislative Covered Bonds) issued under the Banca Monte dei Paschi di Siena S.p.A. (BMPS or the Issuer) EUR 10,000,000,000 covered bond programme (BMPS OBG1 or the Programme) guaranteed by MPS Covered Bond S.r.l. All ratings remain Under Review with Negative Implications.

The confirmation follows the review of certain proposed amendments that would entail an extension of the Maturity Date and of the Extended Maturity Date for some of the Series. While they have not yet been implemented as of today, the proposed extensions would not, in DBRS’s view, in and of themselves result in the OBGs’ being downgraded or the relevant ratings’ being withdrawn.

-- Series 13: Proposal to extend the maturity date from June 2017 to December 2025;
-- Series 14: Proposal to extend the maturity date from September 2017 to March 2026;
-- Series 19: Proposal to extend the maturity date from July 2019 to June 2026;
-- Series 20: Proposal to extend the maturity date from September 2019 to September 2026;
-- Series 21: Proposal to extend the maturity date from January 2020 to December 2026;
-- Series 22: Proposal to extend the maturity date from March 2020 to March 2027.

As of today, there are 16 series of OBG outstanding under the Programme for a total nominal amount of EUR 8.92 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (low), being the Long-Term Critical Obligations Rating (LT COR) of BMPS. BMPS is the Issuer and the Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Very Strong assigned to the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest CPCA in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (low).
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 25.2% to which DBRS gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.9, and an Issuer-committed Asset Percentage of 83%, corresponding to a level of committed OC of 20.5%.

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. In accordance with the DBRS “Rating European Covered Bonds” methodology, no forced asset liquidation has been modelled for this transaction, given the conditional pass-through structure, and DBRS has assumed several prepayment scenarios, ranging between a 1% and 20% Prepayment Rate.

Everything else being equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the covered bonds rating. In addition, the ratings of the covered bonds would be downgraded if any of the following were to occur: (1) The quality and consistency of the cover pool (CP) were no longer sufficient to support a two-notch uplift for high recovery prospects, (2) the LSF Assessment associated with the Programme were downgraded to Average or below or (3) the CPCA were downgraded below BBB (low).

BMPS OBG1 has a conditional pass-through structure. In case of enforcement of the guarantee, the Guarantor is not contractually bound to pursue a forced asset sale of the CP in a distressed market environment. Notwithstanding this, the Guarantor can still attempt to liquidate the assets with a view to meeting its payment obligations on the pass-through series and on the earliest maturing covered bonds. In so doing, the Guarantor shall attempt to maintain the Programme’s OC proportionally to all asset sales. Additionally, the Programme documentation provides for the sale of the assets to take place only as long as the Amortisation Test (which sets the level of Asset Percentage in the transaction at 83%) is complied with before and after the sale. Should the Amortisation Test be breached, all series switch to pass-through payment on a pari passu and pro rata basis. DBRS has not modelled stresses on forced asset sales in its analysis, because the Guarantor is not obliged to liquidate the assets.

The Bank of New York Mellon (Luxembourg) S.A., Italian branch and The Bank of New York Mellon S.A./NV, London branch have replaced BMPS in its capacity as Italian and English account bank, respectively, and they are compliant with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology. Commingling and set-off risk are mitigated by the computation of such risks in the asset coverage tests.

As of today, the total outstanding amount of OBG is EUR 8.92 billion, while the total CP balance as of March 2017 was EUR 11.66 billion, including EUR 11.18 billion of residential mortgages plus EUR 484.93 million of cash. The total OC, net of Commingling and Set-Off amounts, is 28.0%.

As of March 2017, the mortgage CP comprised 135,659 residential mortgages granted to individuals (92.5% of the mortgage CP notional is composed of borrowers classified as SAE 600) and other debtors of BMPS, with an average loan amount of EUR 82,412. All mortgages have been originated by BMPS and other banks that are part of the BMPS group. An additional stress was associated with borrowers not classified as SAE 600.

The weighted-average (WA) current loan-to-value of the mortgages is 49.0% with a WA seasoning of 6.9 years. The CP is well-distributed across Italy, with the highest concentrations in Tuscany (17.2%), Lazio (15.8%) and Veneto (13.7%).

The CP comprises fixed-rate loans (14.5% by outstanding balance, including optional currently fixed) and floating-rate loans (85.5% by outstanding balance, including optional currently floating). The floating-rate mortgages are indexed to different plain vanilla bases and reset at different dates. Further, 66.4% of OBG notional pays a fixed-rate coupon until the expected maturity, and if the maturity is extended, the relevant series becomes a pass-through series paying a floating rate plus a spread on a quarterly basis. DBRS has modelled interest rate risk mismatch in its cash flow analysis.

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

As of the cut-off date, the WA life of the CP was 9.9 years, which is longer than the 4.1-year WA life on the OBG calculated as of today and considering the expected maturity. This risk is mitigated by the long Extendable Maturity Date, which falls 38 years after the Maturity Date.

DBRS has assessed the LSF related to the BMPS OBG1 as Very Strong according to its rating methodology. For more information, please refer to DBRS’s “Italian Covered Bonds Legal and Structuring Framework Review” commentary, available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

This press release replaces a previous press release that had incorrectly stated that the proposed amendments had been implemented.

The principal methodology applicable to the rating is “Rating European Covered Bonds.” This can be found at http://www.dbrs.com/about/methodologies.

In DBRS opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the Cash Flow analysis.

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action. DBRS reviewed the proposed amendment of the final terms of Series 13, 14, 19, 20, 21 and 22.

DBRS is undertaking a review and will remove the ratings from this status as soon as it is appropriate.

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

The sources of data and information used for these ratings include Investor Reports and stratification information on the cover pool provided by the Issuer that allowed DBRS to further assess the portfolio.

DBRS considers the information available to it for the purposes of providing these ratings was 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 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 17 March 2017, when DBRS maintained the A (high) ratings of BMPS CB1 Under Review with Negative Implications.

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

This rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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 Surveillance Analyst: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 23 September 2015

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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.