DBRS Assigns ‘A’ Rating to Banca Monte dei Paschi di Siena P2 Covered Bonds

DBRS Ratings Limited (DBRS) has today assigned a rating of ‘A’ to Banca Monte dei Paschi di Siena (BMPS or the “Issuer”) covered bonds issued out of Programme 2. BMPS has EUR 8.4 bn Obbligazioni Bancarie Garantite (OBG, the Italian legislative covered bonds) outstanding under Programme 2 (P2).

The rating reflects the following analytical considerations:
•The senior unsecured debt rating of BMPS of BBB with Negative Trend.
•The Legal and Structuring Framework (LSF) assessment of “Very Strong” associated with the BMPS P2 OBG.
•The strength of the Italian OBG Law, which grants OBG holder a priority right over the cover pool.
•The cover pool credit assessment of BBB in association with a supporting Asset Percentage (AP) of 75.5%. This compares to a currently available AP of 73.5% and an Issuer-Commitment AP of 75.5%.
•BMPS capabilities with respect to origination of the cover assets and servicing of the cover pool.

All else equal, a downgrade of the Issuer rating by one notch would lead to a downgrade of the OBG by one notch.

Following an Issuer default, the maturities of all OBG are extended to the long due for payment date, being 31 December 2057, and cash flows from the cover pool are distributed to OBG holders via a modified pass-through mechanism. According to such mechanism, moneys are accumulated pro-rata and pari-passu towards redemption of each series of OBG.

The OBG holders benefit from a reserve that builds over time with the cash flows from the cover pool up to an amount that is sufficient to cover senior costs and interest payments on the OBG for the subsequent six months rolling.

These two features, combined with the programme adherence to the Italian OBG Law, contribute to the “Very Strong” LSF assessment for this programme.

As of 30 June 2013, the cover pool amounts to 11.2 bn. All the analysis has been run with portfolio data as of 30 March 2013 (the cut-off date) for which DBRS received loan-by-loan data on 81% of the total pool.

As of the cut-off date, the cover pool is comprised of residential mortgage loans (62%) as well as commercial (38%). Out of the residential mortgages, 22.7% were granted to employees of the Issuer. For 50% of the loans granted to employees, assumed to be dismissed in case of an Issuer insolvency, DBRS has assumed a two year default rate of 17.7% and recoveries in line with DBRS RMBS methodology. The combined expected loss for the entire cover pool is 14.02% in a rating scenario in line with the cover pool credit assessment.

The reference rate of the underlying loans is split into floating (73%), fixed for life (19%) and modular (8%, which can switch from fixed to floating and vice-versa at pre-determined dates). All the OBG issued carry a floating coupon. As there are no hedge agreements in place, OBG holders are exposed to an interest rate mismatch which has been taken into account in DBRS cash flow modeling.

All cover assets are Euro denominated as well as all OBG issued. Hence, OBG holders are currently not exposed to any foreign exchange risk.

As of the cut-off date the weighted average life of the cover pool was 8.53 years based on 0% pre-payment rate, which is considerably longer than the 2.54 years weighed average life on the OBG when taking into account the expected maturity. However, following an assumed default of the issuer, the OBG switch to modified pass-through with a final maturity that is over the longest asset maturity. This, in DBRS view, eliminates any need to liquidate the cover pool. The OBG holders have the option, via an extraordinary resolution and with the consent of the representative of the bondholders, to liquidate the cover pool in whole or in part. DBRS considers this event as extremely remote and has not accounted for it in its modeling.

Upon an Issuer event of default, the modified pass-through structure provides for moneys, though allocated on a pro-rata and pari-passu basis to all OBG, to be accumulated (in an account opened by the guarantor with an Eligible Institution) and paid out on the expected maturity date of each OBG. This implies negative carry that has been taken into account in the cash flow modeling. As a deviation from its Rating European Covered Bonds methodology, DBRS has assumed several prepayment scenarios ranging between 0% and 20% PPR.

The maximum 75.5% AP in line with an A rating on the OBG may change over time with the changing amortization profile of the cover pool and the OBG and the issuance of new OBG.

For further information on Banca Monte dei Paschi di Siena P2 Covered Bonds please refer to the ratings report that will shortly be available on www.dbrs.com

Notes:
All figures are in Euros unless otherwise noted.

The principal methodologies applicable are:
• Rating European Covered Bonds
• Global Methodology for Rating Banks & Banking Organisations
• Legal Criteria for European Structured Finance Transactions
• Master European Residential Mortgage-Backed Securities Rating Methodology
• Master European Granular Corporate Securitisations (SME CLOs)
• Master European Structured Finance Surveillance Methodology
• Operational Risk Assessment for European Structured Finance Servicers
• Unified Interest Rate Model Methodology for European Securitisations

These can be found on dbrs.com under Methodologies. For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area”.

The source of information used for this rating include data related to the cover pool provided by Banca Monte dei Paschi di Siena. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is the first DBRS rating on this financial instrument.

For additional information on this rating, please see the related linking document. The individual linking document for this transaction is located at http://www.dbrs.com/research/260303/linking-document-banca-monte-dei-paschi-di-siena-programme-2.pdf

For further information on DBRS’s historic default rates published by the European Securities and Markets Administration (“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: Valentina Cicerone
Initial Rating Date: 3 September 2013
Rating Committee Chair: Claire Mezzanotte
Lead Surveillance Analyst: Keith Gorman

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom

Registered in England and Wales: No. 7139960