DBRS Confirms Rating on Banca Monte dei Paschi di Siena Programme 2 Covered Bonds and Removes UR-Negative

DBRS Ratings Limited (DBRS) has today confirmed the ‘A’ rating on Banca Monte dei Paschi di Siena SpA (“BMPS”) covered bonds issued out of BMPS Programme 2 (“BMPS P2 OBG”). At the same time, DBRS removed the ratings from Under Review with Negative Implications after removal of Banca Monte dei Paschi di Siena SpA ratings from Under Review with Negative Implications on 3 July 2014.

BMPS has EUR 8.4 bn Obbligazioni Bancarie Garantite (OBG, the Italian legislative covered bonds) outstanding under Programme 2 (P2).

The confirmation follows the completion of a full review of the ratings and also reflects the implementation of the updated methodology DBRS uses to rate structured finance transactions including loans to European SMEs (see “Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)”, published 15 October 2013.

This methodology supersedes the previous methodology “Master European Granular Corporate Securitisations (SME CLOs)” published 14 June 2011 and the “Small and Medium Enterprise Loans” section of the “Master European Structured Finance Surveillance Methodology” published 5 December 2012.

DBRS has increased its PD assumptions since the portfolio performance shows a deterioration in terms of defaults and level of delinquencies on the basis of the updated historical performance data provided by BMPS. On the contrary, the weighted average recovery rates have improved due to the implementation of the updated methodology.

BMPS P2 OBGs are rated ‘A’ by DBRS in accordance with ‘Rating European Covered Bonds Methodology’ and the rating is based upon 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 cover pool credit assessment of ‘BBB’, and maximum committed AP of 75.5%.

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 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 such mechanism, moneys are 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 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.

As of 31 March 2014, the mortgage cover pool amounts to Eur 11.5 bn resulting in a current available AP of 72.97%. The maximum contractual AP is 75.5%. The programme also includes Eur 1.6 bn of Principal Available Funds.

As of 31 March 2014 the mortage cover pool was comprised by mortgages secured on a residential property (60%) as well as commercial (40%). 37% of the cover pool notional amount was granted to individuals classified with SAE 600 as per Bank of Italy definition, 63% to other debtors including SMEs. Out of the total cover pool, 14% was granted to employees of the Issuer, and is subject to additional stresses (see rating report published on www.dbrs.com).

The reference rate of the underlying loans was split into floating (77.8%), fixed for life (14.7%) and modular (7.5%), 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.

Notes:
All figures are in Euro unless otherwise noted.
The principal methodologies applicable is: Rating European Covered Bonds.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release. This can 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 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 information used for this rating include data related to the cover pool provided by BMPS and an updated set of historical default performance data. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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 January 14, 2014 when DBRS maintained the ratings on Under Review with Negative Implications following similar action on BMPS.

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

Everything else equal, should BMPS rating be downgraded by one notch to ‘ BBB (low) ’, then the covered bonds ratings would be downgraded by one notch to ‘A’ (low).

For further information on DBRS 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
Initial Rating Committee Chair: Claire Mezzanotte

Last Rating Date: 14 January 2014

Lead Analyst: Valentina Cicerone
Rating Committee Chair: Claire Mezzanotte

DBRS Ratings Limited
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United Kingdom

Registered in England and Wales: No. 7139960

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

Rating European Covered Bonds
Legal Criteria for European Structured Finance Transactions
Master European Structured Finance Surveillance Methodology
Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
Operational Risk Assessment for European Structured Finance Servicers
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
Unified Interest Rate Model for European Securitisations