DBRS Assigns A (high) Rating to Banca Monte dei Paschi di Siena SpA Covered Bonds Guaranteed by MPS Covered Bond S.r.l., Series 18

DBRS Ratings Limited (DBRS) has today assigned an A (high) rating to the Series 18 Obbligazioni Bancarie Garantite (OBG, the Italian legislative Covered Bonds) issued under the Banca Monte dei Paschi di Siena S.p.A. (BMPS or the Issuer) EUR 10,000,000,000 covered bond programme (BMPS OBG1 or the Programme) guaranteed by MPS Covered Bond S.r.l. Concurrently, DBRS has confirmed its A (high) rating on the other OBG outstanding under the Programme. Following the issuance of Series 18, there are 14 series of OBG for a total nominal amount of EUR 8.57 billion outstanding under the programme.

The A (high) rating assigned to BMPS OBG1 reflects the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of BBB. BMPS is the Issuer and 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 BB (High), being the lowest CPCA in line with the final covered bond rating.

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

-- A two-notch uplift for high recovery prospects.

-- A committed maximum asset percentage (AP) of 77.5%.

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.

Everything else being equal, a downgrade of the CBAP by two notches would lead to a downgrade of the covered bonds rating by one notch. This is because, currently, the contractually committed maximum AP may support a CPCA of BBB (low).

In addition, the ratings of the Programme would be downgraded if any of the following occurs: (1) the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects; or (2) the LSF Assessment associated with the programme were downgraded.

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, allows 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 OBG 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 meeting 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 overcollaterlisation (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.

As of the end of September 2015, the cover pool (CP) included EUR 12.268 billion of first and second-ranking residential mortgage loans and EUR 221 million of cash.

As of the end of September 2015, the mortgage CP comprised 143,171 residential mortgages granted to individuals (for 92.81% of the mortgage CP notional is composed of borrowers classified as SAE 600) and other debtors of BMPS with an average loan amount of EUR 85,690. 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 50.8% with a seasoning of 5.9 years. The CP was mainly distributed between northern Italy (39.35% by outstanding balance), central Italy (39.78%) and southern Italy (20.87%).

The CP comprised all-life fixed loans (13.61% by outstanding balance) and floating-rate loans (86.39%). The non-fixed rate mortgage loans are indexed to different plain vanilla basis and reset at different dates. Following the repayment of Series 9, 78.74% 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 are 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 a 0% pre-payment rate, which is longer than the 4.3 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.

In DBRS’s opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, an asset analysis was not conducted. A review of the transaction 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.

The last rating action on this transaction took place on 28 October 2015, when DBRS assigned a rating to the Series 17 OBG and confirmed the ratings on all outstanding OBG.

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: 23 September 2015
Initial Rating Committee Chair: Quincy Tang

Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Quincy Tang

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
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
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