DBRS Assigns BBB (high) Ratings to Banca Carige SpA Covered Bonds Guaranteed by Carige Covered Bond S.r.l.

DBRS Ratings Limited (DBRS) has today assigned BBB (high) ratings to three series of the Obbligazioni Bancarie Garantite (OBG, the Italian legislative covered bonds) outstanding under the Banca Carige SpA (Carige or the Issuer) EUR 5,000,000,000 covered bond programme (Carige OBG1 or the Programme) guaranteed by Carige Covered Bond S.r.l.. There are 19 series of OBG outstanding under the Programme for a total nominal amount of EUR 2.93 billion.

The BBB (high) rating assigned to the OBG issued under the Carige OBG1 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. Carige is the Issuer and the Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Adequate associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BB, being the lowest CPCA in line with the final covered bond rating.
-- An LSF-Implied Likelihood (LSF-L) of BBB (low).
-- Two notches uplift for good recovery prospects.
-- A committed maximum asset percentage of 80% as expressed in the investor report and an overcollateralisation DBRS gives credit to of 44%, being the minimum observed in the last 12 months (47.4%) multiplied by a scaling factor of 0.93.

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.

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 BBB (high), (2) the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for good recovery prospects, (3) the LSF Assessment associated with the Programme were downgraded or (4) volatility in the financial markets caused the currently estimated market value spreads to increase.

DBRS has assessed the LSF related to the Carige OBG1 as Adequate according to its rating methodology. The Adequate LSF Assessment associated with the Carige OBG1 reflects DBRS’s view on: (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 15 months upon an event of default of the issuer, while a firesale 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 due in the next three months; (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.

Deutsche Bank AG, London Branch, acts as Transaction account bank. The DBRS private ratings of Deutsche Bank AG, London Branch comply with the threshold for the Account Bank given the rating assigned to the OBG, as described in the “Legal Criteria for European Structured Finance Transactions” and “Rating European Covered Bonds” methodologies. Credit Suisse International is both the Cover Pool Swap counterparty and the Covered Bonds Swap counterparty. However, the swap documentation does not incorporate DBRS language. As such, no credit was given to swaps in DBRS’s analysis.

As of end of September 2015, the CP included EUR 4.4 billion of first economic ranking residential mortgage loans and EUR 237.0 million of commercial loans.

The CP comprised 59,226 residential mortgages and 1,675 commercial mortgages. The mortgages have been originated by all the network banks part of the Carige group.

The weighted-average current loan-to-value of the mortgages was 47.51% with a seasoning of 6.7 years. The CP was mainly distributed between Northern Italy (68% by outstanding balance with 41% in Liguria), Central Italy (24%) and Southern Italy (8%).

As of end of September 2015, the CP comprised fixed-rate loans (18.5% by outstanding balance) and floating-rate loans (81.5%). The floating-rate mortgage loans are indexed to different plain vanilla basis and reset at different dates

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 11.9 years based on 0% pre-payment rate, which is longer than the 5.5 years weighted-average life on the OBG when taking into account the expected maturity. This risk is partially mitigated by the 15-month maturity extension in case of an Issuer event of default and by the 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.

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, is 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: 23 November 2015
Initial Rating Committee Chair: Quincy Tang

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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.

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

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