DBRS Assigns “A” Rating to Banca Monte dei Paschi di Siena S.p.A. Covered Bonds 2 Guaranteed by MPS Covered Bond 2 S.r.l., Series 20

DBRS Ratings Limited (DBRS) has today assigned an “A” rating to the Series 20 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 20,000,000,000 covered bond programme (BMPS OBG2 or the Programme) guaranteed by MPS Covered Bond 2 S.r.l. Series 20 is a EUR 600 million floating-rate bond, linked to Euribor 3m +1% maturing on 29 July 2019. Concurrently, DBRS has confirmed its “A” rating on the other OBGs outstanding under the Programme. Following the issuance of Series 20, there are 13 series of OBG outstanding under the programme for a total nominal amount of EUR 7.6 billion.

The rating is based on the following analytical considerations:

-- A Covered Bonds Attachment Point of BBB. BMPS is the Issuer and Reference Entity for the Programme and it was assigned a Long Term Critical Obligations Rating of BBB on 4 February 2016.
-- A DBRS Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BB (high), being the lowest in line with the assigned CB rating.
-- A LSF-Implied Likelihood (LSF-L) of A (low).
-- One-notch uplift for good recovery prospects.
-- A committed maximum asset percentage (AP) of 80.6%. The issuer has communicated its intention to increase its AP commitment from the previous level of 75.5%.

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. In accordance with the “Rating European Covered Bonds” methodology, no forced asset liquidation has been modelled for this transaction given the conditional pass-through structure, and DBRS has assumed several prepayment scenarios, ranging between 0% and 20% Prepayment Rate.

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 quality and consistency of the cover pool were no longer sufficient to support a one-notch uplift for good recovery prospects, (2) the relative amortisation profile of OBG and CP moved adversely, or (3) the LSF Assessment associated with the Programme were downgraded..

Following an Issuer default, the maturities of all OBG are extended to the long due for payment date, 31 December 2057, and cash flows from the cover pool are allocated to all series on a pro rata and pari passu basis and distributed to OBG holders via a modified pass-through mechanism. According to such mechanism, monies are accumulated in an account opened by the guarantor with an eligible institution and paid out on the expected maturity date of each OBG. This implies negative carry that has been taken into account in the cash flow modeling.

The issuer performs several roles under the programme documents. According to the updated “Legal Criteria for European Structured Finance Transactions,” a CBAP as low as BBB (low) is compatible, in DBRS’s view, with the issuer performing the role of account bank for the programme in association with the “A” ratings on the OBG, as well as the issuer not posting the potential set-off amount for the purpose of running the asset coverage test (item “Y” of the ACT formula), nor the Commingling Reserve Amount under the servicing agreement. The current CBAP of BBB is also compatible with the Guarantor not yet appointing a Back-up Servicer Facilitator under the provision of the servicing agreement. However, should the Issuer Rating be downgraded by two notches, and should the above-mentioned remedies not be actioned, or equivalent remedies not put in place, the covered bonds may be downgraded.

The OBG holders benefit from a reserve that is sufficient to cover senior costs and interest payments on the OBG for the subsequent six months rolling.

As of December 2015, the total CP balance was EUR 10.0 billion, including EUR 9.5 billion of mortgages and EUR 469 million of cash. Including Series 20, there are EUR 7.6 billion covered bonds outstanding under BMPS OBG2, giving a total overcollateralisation of 31.8%.

As of December 2015, the mortgage cover pool comprised mortgages secured on residential properties (62.0%), as well as commercial properties (38.0%). The cover pool comprises 77,292 mortgages with a weighted-average current unindexed loan-to-value ratio (WACLTV) of 39.3%. The pool is well-seasoned, with a WA seasoning of 6.9 years and geographically well diversified across Italy, with the top three regions for concentration being Tuscany (25.6%), Lazio (16.2%) and Lombardy (11.6%). 15.74% of the pool was granted to employees of the Issuer, and is therefore subject to additional stresses (see rating report published on www.dbrs.com).

The reference rate of the underlying loans was split into floating- (84.7%) and fixed-rate mortgages (15.3%). All of the OBG issued carry a floating coupon. As there are no hedge agreements in place, OBG holders are exposed to an interest rate mismatch, which has been taken into account in DBRS’s cash flow modeling.

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 December 2015, the weighted-average life of the cover pool was 6.4 years, which is longer than the 1.6 years weighted-average life on the OBG when taking into account the expected maturity. This risk is mitigated by the Long Due for Payment Date, which falls on 31 December 2057.

DBRS has assessed the LSF related to BMPS P2 OBG Programme as Very Strong, according to its rating methodology. For more information, please refer to DBRS commentaries “DBRS Assigns LSF Assessment to Italian Covered Bonds” and “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. 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 commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for these ratings include a 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 programme took place on 3 February 2016, when DBRS assigned an “A” rating to series 18 and 19 and confirmed its “A” rating on all other series outstanding.

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 (ESMA) 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: Valentina Cicerone
Initial Rating Date: 3 September 2013
Initial Rating Committee Chair: Claire Mezzanotte

Last Rating Date: 3 February 2016

Lead 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)
-- Critical Obligations Rating Criteria
-- 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
-- Rating CLOs and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
-- 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 analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375