DBRS Assigns BBB (high) Rating to Banca Carige SpA Covered Bonds, Series 634

DBRS Ratings Limited (DBRS) has today assigned a rating of BBB (high) to Series 634 Obbligazioni Bancarie Garantite (OBG, the Italian legislative covered bonds) issued 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. Series 634 is a EUR 500 million floating-rate bond, indexed to three-month Euribor, maturing on 25 February 2021.

Concurrently, DBRS has confirmed its BBB (high) ratings on the other three series rated by DBRS. Including Series 634, there are 20 series of OBG outstanding under the Programme for a total nominal amount of EUR 3.43 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) reflective of the likelihood that the source of payments will switch from the Reference Entity to the Cover Pool (CP). 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 high recovery prospects.
-- A committed maximum asset percentage of 80% as expressed in the investor report and an overcollateralisation DBRS gives credit to of 28%, being the minimum observed in the last 12 months adjusted by a scaling factor of 0.93.

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 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 Carige OBG1.

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 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 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 CP were no longer sufficient to support a two-notch uplift for high 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.

Deutsche Bank AG, London Branch, acts as the 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 the end of December 2015, the CP included EUR 4.3 billion of first economic ranking residential mortgage loans, EUR 222.8 million of commercial loans and EUR 151.1 million of cash. There are 20 series outstanding under the Programme for a total of EUR 3.43 billion. The currently available overcollateralisation is 35.2%.

The CP comprised 57,065 residential mortgages and 1,602 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 47.17% with a seasoning of 6.8 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 December 2015, the CP comprised fixed-rate loans (25.5% by outstanding balance) and floating-rate loans (74.5%). 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 CP was roughly 12 years based on 0% pre-payment rate, which is longer than the 4.2 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.

DBRS has assessed the LSF related to Carige 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 CP 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 23 November 2015, when DBRS assigned ratings to selected series of Banca Carige SpA Covered Bond Programme 1.

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

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 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 and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to Small and Medium-Sized European Enterprises (SMEs)
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Unified Interest Rate Model Methodology for European Securitisations
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- DBRS Criteria: Support Assessments for 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