DBRS Assigns Rating of “A” to Banco Popolare Societa Cooperativa OBG Programme 1, Series 10

DBRS Ratings Limited (DBRS) has today assigned a rating of “A” to the Series 10 Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banco Popolare Societa Cooperativa (Banco Popolare or the Issuer) EUR 10,000,000,000 covered bond (CB) programme (BP OBG1 or the Programme) guaranteed by BP Covered Bond S.r.l. Series 10 is a EUR 1 billion floating rate bond, indexed to 1-month Euribor, maturing on 31 March 2018.

Concurrently, DBRS has confirmed its “A” rating on the other OBGs outstanding under the Programme. Including Series 10, there are eight series of OBG outstanding under the Programme for a total nominal amount of EUR 8.2 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) set at BBB (high). Banco Popolare is the Issuer and Reference Entity (RE) for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Adequate associated with the Programme.
-- A LSF-Implied Likelihood (LSF-L) of BBB (high). In DBRS’s view, the OBG’s LSF-L is limited by the CBAP.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 14.95% to which DBRS gives credit, being the minimum observed OC level during the past 12 months, adjusted by a scaling factor of 0.9. DBRS gives limited credit to the cash accumulating on the account bank as explained below.

DBRS released its Critical Obligations Rating (COR) Criteria on 2 February 2016 and assigned COR ratings to those banks that have the necessary characteristics on 4 February 2016. The COR addresses the risk of default of particular obligations/exposures at certain banks that are considered critical and have a higher probability of being excluded from bail-in and remaining in a continuing bank in the event of the resolution of a troubled bank than other senior unsecured obligations, such as can occur under the implementation of the Bank Recovery and Resolution Directive (BRRD). DBRS assigned a long-term COR rating of BBB (high) to Banco Popolare.

DBRS published a request for comments for its “Rating European Covered Bonds Methodology” on 4 February 2016, which proposes a new analysis for deriving the CBAP of those European Programmes that have a reference entity (RE) that is subject to the BRRD. The proposed method involves the use of the RE’s COR alongside the current senior unsecured rating (RE-SUR) as a reference rating for the CBAP and the possibility of notching the rating of CBAP down by up to one notch from the COR or up by up to two notches above RE-SUR in certain circumstances.

Everything else being equal, should the request for comments be approved in the proposed form, DBRS expects no impact on the ratings of the OBG issued under BP OBG1.

The transaction was modelled using 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 CB 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, or (2) the quality and consistency of the CP were no longer sufficient to support a two-notch uplift for high recovery prospects.

Banco Popolare acts as transaction account bank. The replacement trigger on Banco Popolare in its capacity as account bank is not fully compliant with DBRS’s counterparty criteria; hence, DBRS gives limited credit to the cash accumulating with the account bank in accordance with the “Rating European Covered Bonds” methodology.

Credit Suisse International is the Cover Pool Swap counterparty and UBS Limited, Credit Suisse International, BBVA, Natixis and HSBC act as the Covered Bonds Swap counterparty; however, the swap documentation does not incorporate DBRS's language. As such, no credit was given to swaps in DBRS’s analysis.

As of the end of December 2015, the CP included EUR 9.3 billion of first economic-ranking residential mortgage loans, all originated by Banco Popolare and network banks of the group, and EUR 1.6 billion of cash. There are eight series outstanding for a total of EUR 8.2 billion. The currently available OC is 33.7%.

The weighted-average (WA) current loan-to-value of the mortgages was 54.17% with a seasoning of 5.6 years. The CP was mainly distributed between Northern Italy (57.7% by outstanding balance with 27.8% in Lombardy), Central Italy (34.1%) and Southern Italy (8.2 %).

As of end of December 2015, the CP comprised fixed-rate loans (26.5% by outstanding balance) and floating-rate loans (73.5%). The floating-rate mortgage loans are indexed to different plain vanilla basis and reset at different dates.

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

As of the cut-off date, the WA life of the cover pool was roughly ten years based on a 0% prepayment rate, which is longer than the 1.8 years WA 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 OC.

DBRS has assessed the LSF related to the BP OBG1 as Adequate according to its rating methodology. For more information, please refer to DBRS commentaries “Italian Covered Bonds: Legal and Structuring Framework Review,” available at www.dbrs.com.

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. In DBRS’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, an asset analysis and an operational risk review were not conducted. 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.

The last rating action took place on 15 February 2016, when DBRS assigned ratings to the Banco Popolare Societa Cooperativa Covered Bonds 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: 15 February 2016
Initial Rating Committee Chair: Quincy Tang

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

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960.

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
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Global Methodology for Rating Banks and Banking Organisations
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- The Effect of Sovereign Risk on Securitisations in the Euro Area
-- Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings

A description of how DBRS methodologies are collectively applied can be found at http://www.dbrs.com/research/278375.