DBRS Assigns Provisional Ratings to Banca Monte dei Paschi di Siena Covered Bonds Guaranteed by MPS Covered Bond S.r.l.

DBRS Rating Limited (DBRS) has today assigned a provisional rating of A (high) Under Review with Negative Implications to Banca Monte dei Paschi di Siena (BMPS or the Issuer) Obbligazioni Bancarie Garantite (OBG, the Italian legislative covered bonds) outstanding under the Programme guaranteed by MPS Covered Bond S.r.l. €10,000,000,000 covered bond programme (BMPS OBG1 or the Programme). There are 14 series of OGB outstanding for a total nominal amount of EUR 8.32 billion.

This rating is Under Review with Negative Implications because the BMPS Senior Long-Term Debt and Deposit Rating of BBB (low) is also Under Review with Negative Implications. On 20 May 2015, DBRS started a review of the treatment of Systemic Support in its Financial Institutions rating analysis. At that time, the ratings of the Issuer were already and remained Under Review with Negative Implications.

DBRS published on 22 May 2015 a Request For Comments for the “Rating European Covered Bonds” methodology that proposes a new analysis for the determination of the Covered Bonds Attachment Point (CBAP) for those reference entities (REs) that are subject to the Bank Recovery and Resolution Directive (BRRD). Both the direction and the size of the combined impact is uncertain; however, the rating of the OBG is Under Review with Negative Implications as the review of the Issuer ratings also involves a review of the Intrinsic Assessment.

The review on the covered bonds will be resolved only once the conditions that lead to the assignment of review on the Issuer Rating are resolved and the Request For Comments is finalised.

The rating action reflects the following analytical considerations:
-- A Covered Bonds Attachment Point of BBB (low), being the Issuer Rating. The Issuer is also 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) in association of a committed asset percentage (AP) of 77.5%. This is the lowest CPCA in line with the final covered bonds rating.
-- An LSF-Implied Likelihood (LSF-L) of A (low).
-- Two notches uplift for high recovery prospects.

Everything else equal, a downgrade of the Reference Entity rating by one notch to BB (high) would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch to “A”. Everything else equal, a downgrade of the Reference Entity rating by three notches to BB (low) would lead to a downgrade of the LSF-L by two notches, resulting in a downgrade of the covered bonds rating by two notches to A (low).

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 two notches uplift for high recovery prospects.

DBRS has assessed the LSF related to the BMPS OBG1 as “Very Strong” according to its rating methodology. The LSF assessment of “Very Strong” reflects DBRS’s view of: (1) the satisfactory level of segregation provided by the OBG legal framework and the OBG holders first priority right on the CP, in combination with appropriate contractual mitigants in relation to residual set-off, commingling, and clawback risk; (2) the conditional pass-through nature of the structure whereby, following a guarantor enforcement notice, the series which have not been repaid on their expected maturity date become pass through with (a) the maturity extended to a date which, in DBRS’s stressed simulations, allow all loans in the CP to amortise fully and related recoveries to be collected and (b) proceeds from the cover pool allocated pro rata and pari passu to the series of OBG which are pass-through; (3) a dynamic liquidity reserve set on each payment date to a level sufficient to cover OGB interests and senior costs (including swaps) due during the subsequent six months rolling (the reserve will be funded in the waterfall up to such level); (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.

In case of enforcement of the guarantee, the Guarantor is not contractually bound to pursue a forced asset sale of the cover pool in a distressed market environment. Notwithstanding this, the Guarantor can still attempt to liquidate the assets with a view to meet 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 overcollateralisation (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 is set at 75% of the latest OC equivalent to the level of AP in the transaction) 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 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.

The transaction was modelled with the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets and interest rate stresses. As a deviation from its “Rating European Covered Bonds” methodology, no forced asset liquidation has been modelled for this transaction given the conditional pass-through structure. Furthermore, DBRS has assumed several prepayment scenarios ranging between 0% and 20% PPR.

As of the end of January 2015, the cover pool (CP) included EUR 11.553 billion of first and second ranking residential mortgage loans and EUR 0.406 billion of cash. All the analysis takes into account portfolio data as the end of January 2015 (the cut-off date) for which the Issuer has provided detailed information.

As of the cut-off date, the mortgage CP comprised 134,083 residential mortgages granted to individuals (for 93.2% of the mortgage CP notional) and other debtors of BMPS with an average loan amount of EUR 86,170. The mortgages have been originated by BMPS and other banks part of the BMPS group.

The weighted-average current loan-to-value of the mortgages was 50.9% with a seasoning of 5.7 years. The CP was mainly distributed between northern Italy (51% by outstanding balance), central Italy (29%) and southern Italy (20%).

The CP comprised all-life fixed loans (11.3% by outstanding balance) and floating-rate loans (85%) as well as loans with interest rate switching options (3.7%, with 1.61% being currently fixed rate). The non-fixed rate mortgage loans are indexed to different plain vanilla basis and reset at different dates. 77.2% 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 are denominated in euros, as well as all OBG. As such, investors are not currently exposed to any foreign exchange risk.

As of the cut-off date the weighted average life of the cover pool was 10.3 years based on 0% pre-payment rate, which is longer than the 3.9 years weighted-average life on the OBG when taking into account the expected maturity. This risk is mitigated by the long Extendable Maturity Date which falls 38 years after the Maturity Date.

Notes:
All figures are in euros unless otherwise noted.

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

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

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 default performance data and loan-by-loan level 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 this rating was of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; however, Agreed upon Procedures (AUP) are included in the requested documentation. DBRS was supplied with AUP documents. Data checks were performed and DBRS did not apply additional cash flow stresses in its scenarios.

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.

This is the first DBRS rating action on the covered bonds under this Programme.

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: 27 May 2015
Initial Rating Committee Chair: Quincy Tang

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

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
-- Global Methodology for Rating Banks & Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model Methodology for European Securitisations
-- Interplay of European Structured Finance Rating Methodologies