DBRS Upgrades to “A” Ratings of Banca Monte dei Paschi di Siena SpA Programme 2 Covered Bonds, Removes UR-N

DBRS Ratings Limited (DBRS) has today upgraded to “A” from A (low) its ratings on the Obbligazioni Bancarie Garantite (OBG, the Italian legislative Covered Bonds) outstanding under the Banca Monte dei Paschi di Siena S.p.A. (BMPS or the Issuer) EUR 20,000,000,000 covered bond programme (BMPS Programme 2 or the Programme) guaranteed by MPS Covered Bonds 2 S.r.l. Concurrently, the ratings have been removed from the Under Review with Negative Implications (UR-N) status. There are 13 series of OBG for a total nominal amount of EUR 7.0 billion outstanding under the programme.

The rating action follows the finalisation of the review of the credit DBRS gives to sovereign support in its financial institution analysis, as a result of the recent developments in European regulation and legislation regarding the BRRD (Bank Recovery and Resolution Directive) on 29 September 2015, as well as the publication on 8 September 2015 of the updated “Rating European Covered Bonds” methodology. The ratings were placed UR-N since their assignment on 14 July 2015, reflecting, among other factors, the fact that the Intrinsic Assessment was under negative pressure. However, the Intrinsic Assessment was confirmed at BB (high) with a Negative Trend on 29 September 2015.

The “A” rating assigned to BMPS Programme 2 Covered Bonds reflects the following analytical considerations:

-- A Covered Bonds Attachment Point of BBB. BMPS is the Issuer and the Reference Entity for the Programme.

-- A Legal and Structuring Framework (LSF) Assessment of Very Strong associated with the Programme.

-- A Cover Pool Credit Assessment (CPCA) of BBB, being the lowest CPCA in line with the final covered bond rating.

-- An LSF-Implied Likelihood (LSF-L) of A.

-- A committed maximum asset percentage (AP) of 75.5%.

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. 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.

The issuer performs several roles under the programme documents. A CBAP of BBB is compatible, in DBRS’s view, with the issuer performing the role of account bank for the programme, as well as the issuer not posting the potential set-off amount for the purpose of running the asset coverage test (item “Y” of the ACT formula), nor the Commingling Reserve Amount under the servicing agreement. The CBAP of BBB is also compatible with the Guarantor not yet appointing a Back-up Servicer Facilitator under the provision of the servicing agreement. However, should the Issuer Rating be downgraded by one notch, and should the above mentioned remedies not be actioned, the covered bonds would be downgraded by one notch.

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 any of the following occurs: (1) the sovereign rating of the Republic of Italy were downgraded below the CBAP, (2) the quality and consistency of the cover pool were no longer sufficient to support two notch uplift for high recovery prospects, or (3) the LSF Assessment associated with the Programme were downgraded.

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, monies 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 is sufficient to cover senior costs and interest payments on the OBG for the subsequent six months rolling.

DBRS has assessed the LSF related to BMPS P2 OBG Programme as Very Strong, according to its rating methodology. For more information, please refer to DBRS commentaries “DBRS Assigns LSF Assessment to Italian Covered Bonds” and “Italian Covered Bonds: Legal and Structuring Framework Review,” available at www.dbrs.com.

As of September 2015, the mortgage cover pool comprised mortgages secured on a residential property ( 61.63%) as well as commercial (38.37%). 42.99% of the cover pool notional amount was granted to individuals classified with SAE 600 as per the Bank of Italy definition, and 57.01% was to other debtors, including SMEs. Out of the total cover pool, 15.74% was granted to employees of the Issuer, and therefore are subject to additional stresses (see rating report published on www.dbrs.com). The reference rate of the underlying loans was split into floating (81.48%) and fixed-rate mortgages (18.52%). All of 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’s cash flow modeling.

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

As of September 2015, the weighted-average life of the cover pool was 6.3 years based on a 0% pre-payment rate, which is longer than the 1.28 years weighted-average life on the OBG when taking into account the expected maturity. This risk is mitigated by the Long Due for Payment Date which falls on 31 December 2057.

The lead analyst responsibilities for this transaction have been transferred to Vito Natale.

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.

In DBRS’s opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, asset and cash flow analyses were not conducted. A review of the transaction’s legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.
This 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 information used for this rating include test report and stratification tables provided by the issuer and payments reports provided by Securitisation Services. 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. DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

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 since the Initial Rating Date.

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

For further information on DBRS historic default rates published by the European Securities and Markets Administration 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
Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Diana Turner

DBRS Ratings Limited
1 Minster Court, 10th Floor Mincing Lane, London EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960
The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

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

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