DBRS Assigns A (low) Ratings to Unione di Banche Italiane S.p.A. Covered Bonds Guaranteed by UBI Finance CB2 S.r.l.

DBRS Ratings Limited (DBRS) has assigned A (low) ratings to the Obbligazioni Bancarie Garantite (OBG, the Italian legislative Covered Bonds) outstanding under the Unione di Banche Italiane S.p.A. (UBI or the Issuer) EUR 5,000,000,000 covered bond programme (UBI Covered Bonds Programme 2 or the Programme) guaranteed by UBI Finance CB2 S.r.l. There are four series of OBG for a total nominal amount of EUR 2.43 billion outstanding under the programme.

The A (low) rating assigned to the OBG issued under UBI Covered Bond Programme 2 reflects the following analytical considerations:

-- A Covered Bonds Attachment Point reflective of the likelihood that the source of payments will switch from the Reference Entity to the Cover Pool. UBI is the Issuer and Reference Entity for the Programme.

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

-- An LSF-Implied Likelihood (LSF-L) capped at A (low).

-- No recovery uplift.

-- No committed overcollaterlisation.

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, interest rate stresses and market value spreads to calculate liquidation values on the cover pool (CP).

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 the sovereign rating of the Republic of Italy were downgraded below the CBAP.

DBRS has assessed the LSF related to the UBI CB Programme 2 as Average according to its rating methodology. The “Average” LSF Assessment associated with the Programme reflects DBRS’s view of: (1) the satisfactory level of segregation provided by the OBG legal framework and the CB holders’ first priority right on the CP, in combination with appropriate contractual mitigants in relation to set-off, commingling, and clawback risk; (2) the composition of the CP being mixed residential and commercial mortgage loans to borrowers concentrated in an A (low) Domicile Sovereign, combined with a contractual provision to automatically extend each and all CB maturities by 12 months upon an event of default of the issuer, while a fire sale of the CP is triggered immediately following such event of default; (3) a contractual dynamic liquidity reserve set on each payment date prior to an issuer event of default to a level sufficient to cover CB interests and senior costs accruing in the next calculation period (monthly); (4) the role of the Bank of Italy in the supervision of the Italian OBG, combined with the moderate penetration of the OBG as a funding tool for Italian banks and an asset monitor that only indirectly reports to the regulator.

BNP Paribas Securities Services, London Branch, acts as English account bank and qualifies as an eligible institution in accordance with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology. Commingling and set-off risk are mitigated respectively by the cash reserve and the computation of such risk in the nominal value test. No swaps are contemplated under the programme.

As of the end of June 2015, the CP included EUR 3.26 billion of residential and commercial mortgage loans and EUR 47.8 million of cash.

The CP comprised 27,104 mortgage loans. The mortgages have been originated by all the network banks that are part of the UBI group. 36.12% of the loans outstanding were granted to individual (SAE code 600) and the remainder were granted to single proprietorships or SMEs. 15.85% of the total cover pool was granted to employees of the UBI group. DBRS applied additional stresses in this case.

The weighted-average current loan-to-value of the mortgages was 38.27% with a seasoning of 74.4 months. The CP was mainly distributed between Northern Italy (63.8% by outstanding balance with 44.5% in Lombardy), Central Italy (20%) and Southern Italy (16.2%).

The CP comprised loans with a fixed-for-life interest rate (14.8%% by outstanding balance,) as well as other interest rate types (85.2%). The floating-rate mortgage loans are indexed to a different plain vanilla basis and reset at different dates. Open positions are unhedged. This was accounted for in DBRS’s cash flow modelling.

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 6.2 years based on 0% pre-payment rate, which is longer than the three-year weighted-average life on the OBG when taking into account the expected maturity. This risk is partially mitigated by the 12-month maturity extension in case of an Issuer event of default and by the uncommitted overcollateralisation.

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. 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 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. 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 on the covered bonds issued under this programme.

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: Vito Natale
Initial Rating Date: 27 October 2015
Initial Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
1 Minster Court, 10th Floor Mincing Lane, London EC3R 7AA
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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
Derivative 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
Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
Unified Interest Rate Model for European Securitisations
Rating European Covered Bonds

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