DBRS Upgrades to “A” the Ratings of Unione di Banche Italiane S.p.A. Covered Bonds Guaranteed by UBI Finance CB2 S.r.l., Removes Under Review with Positive Implications

DBRS Ratings Limited (DBRS) has today upgraded to “A” from A (low) the ratings of 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 2.25 billion outstanding under the programme. Concurrently, the ratings have been removed from the Under Review with Positive Implications status.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point of “A”, being the Long-Term Critical Obligations Rating of UBI. 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) floored at A.
-- No recovery uplift.
-- No committed overcollateralisation (OC), and a limited level of OC DBRS considers sustainable based on discussions with the issuer and expected market developments.

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, everything else being equal, the OBG ratings would be downgraded if the relative amortisation profile of OBG and CP moved adversely.

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.

The total outstanding amount of OBG is EUR 2.25 billion, while the aggregate balance of loans in the CP is EUR 3.20 billion of residential (41.9%) and commercial (58.1%) mortgages plus EUR 73.60 million of cash, resulting in a total OC of 45.3%.

As of 1 January 2016, the CP comprised 27,062 mortgage loans all originated by network banks that are part of the UBI group.

The weighted-average current loan-to-value of the mortgages was 38.22% with a seasoning of 6.62 years. The CP was mainly distributed between Lombardy (44.93%), Piedmont (11.54%) and Lazio (6.83%).

The CP comprised 89.4% floating-rate mortgage loans, 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.

The weighted-average life of the cover pool is 6.4 years based on a 0% pre-payment rate, which is longer than the four years 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.

DBRS has assessed the LSF related to the UBI OBG2 as Average according to its rating methodology. For more information, please refer to DBRS’s “DBRS Assigns LSF Assessment to Italian Covered Bonds” and “Italian Covered Bonds Legal and Structuring Framework Review” commentaries, both 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 change(s) under consideration do not require the application of the entire principal methodology. Therefore, an asset analysis was not conducted.

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.

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 on this transaction took place on 9 February 2016, when DBRS placed Under Review with Positive Implications the ratings of all outstanding obligations of UBI CB2.

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

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

DBRS Ratings Limited
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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

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

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Global Methodology for Rating Banks and Banking Organisations
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for 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
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating CLOs and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
-- Unified Interest Rate Model Methodology for European Securitisations
-- The Effect of Sovereign Risk on Securitisations in the Euro Area
-- Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings