DBRS Confirms Intesa Sanpaolo Covered Bond Programme Guaranteed by ISP OBG S.r.l. at A (high), Removes UR-Pos.

DBRS Ratings Limited (DBRS) has today confirmed its A (high) rating and removed the Under Review with Positive Implications status on the Obbligazioni Bancarie Garantite (OBG, the Italian legislative covered bonds) outstanding under the Intesa Sanpaolo Covered Bond Programme guaranteed by ISP OBG S.r.l. (the Programme). There are currently EUR 19.59 billion OBG outstanding under the Programme.

The OBG ratings were placed Under Review with Positive Implications on 9 February 2016, following (1) the assignment on 4 February 2016 of a Critical Obligation Rating (COR) of A (high) to Intesa Sanpaolo S.p.A., and (2) the publication on the same date of a Request of Comments for the “Rating European Covered Bonds” methodology that proposes a new analysis for the determination of the Covered Bonds Attachment Point (CBAP) for those Reference Entities (RE) that have been assigned a COR. The Request for Comments was finalized in the proposed form on 8 March 2016.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high). Intesa Sanpaolo S.p.A. is the Issuer and Reference Entity for the Programme. DBRS assigned a COR of A (high) to Intesa Sanpaolo S.p.A. on 4 February 2016.
-- A legal and structuring framework (LSF) assessment of Strong associated with the Programme.
-- An LSF-implied likelihood (LSF-L) floored at A (high).
-- No uplift for recovery prospect.
-- An Issuer-Commitment Asset Percentage increased to 94.5% from 89.29% previously, to which the Issuer commits contractually. This is an equivalent commitment of 5.82% overcollateralization, down from the previous level of 12%. The OC available as of 31 December 2015 is 19.1%.

DBRS has assessed the LSF related to the Programme as 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,” both available at www.dbrs.com.

The transaction was modelled using the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults, recoveries of the assets, interest rate stresses and market value spreads to calculate liquidation values on the cover pool.

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.

Intesa Sanpaolo S.p.A. is the Issuer and, together with other fully owned subsidiaries, an Account Bank for the Programme. A CBAP of ‘A (high)’ satisfies the requirements set in DBRS Legal Criteria for European Structured Finance Transactions and in the Rating European Covered Bonds methodology for the Issuer to perform the role of account bank.

As of the end of December 2015, the Cover Pool (CP), including defaults, comprises EUR 17.15 billion residential mortgages, EUR 3.40 billion commercial loans and EUR 2.78 billion of cash (considering principal component and reserve fund required amount). There are currently 14 series outstanding under the programme for a total amount of EUR 19.59 billion, giving a total overcollateralization of 19.1% (including the reserve fund required amount).

As of December 2015, the mortgage cover pool comprised residential mortgages (83.4%), as well as commercial loans (16.6%), based on the type of debtor being an individual (SAE 600 only of Bank of Italy classification) in the former and other debtors in the latter (with SAE other than 600, including 614 and 615 as per Bank of Italy classification). The cover pool comprises 303,121 mortgages with a weighted-average current unindexed loan-to-value ratio (WACLTV) of 43.09% (WACLT as of November 2015). The pool is well-seasoned, with a WA seasoning of 7.7 years and geographically well diversified across Italy, with the top three regions for concentration being Lombardy (19.5%), Puglia (13.9%) and Veneto (13.1%). All the loans are fully amortizing, the vast majority (94.3%) paying monthly interest rate.

The reference rate of the underlying loans was split into floating-rate (62.6%, of which 8.5% are optional currently paying floating rate) and fixed-rate mortgages (36.2%, of which 2.3% are optional currently paying fixed rate). All of the OBG issued carry a floating coupon. The mismatch is covered with internal interest rate swaps that convert all cover pool cash flows into 3 months Euribor plus a spread.

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

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating European Covered Bonds” (March 8, 2015). This is an event driven rating action and not all sections of the methodology have been applied.

A review of the transaction legal documents was limited to amendments to the Cash Management and Agency Agreement, Master Definition Agreement, Portfolio Administration Agreement, Intercreditor Agreement and Accounts Pledge Agreement whereby Credit Agricole Corporate and Investment Bank, Milan branch, assumed the role of back-up account bank. DBRS also reviewed a French Law Legal opinion. Account Bank counterparty criteria in the programme documentation have also been amended in line with current DBRS criteria. These amendments have no impact on the rating. Other transaction 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 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 at 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 does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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 the ratings of the outstanding OBG Under Review with Positive Implications.

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: 7 November 2014
Initial Rating Committee Chair: Claire Mezzanotte

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

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The rating methodologies 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
-- 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

A description of how DBRS analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.