DBRS Assigns BBB (high) Ratings to Banca Carige SpA Covered Bonds, Series 597 and 598

DBRS Ratings Limited (DBRS) has today assigned a rating of BBB (high) to Series 597 and Series 598 Obbligazioni Bancarie Garantite (OBG, the Italian legislative covered bonds) outstanding 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 597 is a EUR 50 million fixed-rate bond with a 5.35% coupon, issued on 5 November 2012 and maturing on 25 February 2021. Series 598 is a EUR 150 million fixed-rate bond with a 4.5% coupon, issued on 31 October 2012 and maturing on 25 October 2022. Both series are privately placed.

Concurrently, DBRS has confirmed its BBB (high) ratings on the other four series it rates. As of today, 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. There is no Critical Obligations Rating associated with the Reference Entity, nor does DBRS currently classify Italy as a jurisdiction for which covered bonds are a particularly important financing tool.
-- 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 LSF-Implied Likelihood.
-- An LSF-Implied Likelihood (LSF-L) of BBB (low).
-- Two-notch uplift on the LSF-L for high recovery prospects.
-- A committed maximum asset percentage of 80% as expressed in the investor report and an overcollateralisation (OC) DBRS gives credit to of 34.5%, being the minimum observed in the last 12 months adjusted by a scaling factor of 0.93.

The 29% OC ratio, to which DBRS gives credit and mentioned in the press release relating to the issuance of Series 634, was conservatively determined considering the CP amount as of December 2015 and total liabilities as of February 2016. However, the CP was increased with the effective date of 15 February 2016. As such, the correct OC ratio to which DBRS gives credit is restated at the current level of 34.5%.

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.

The level of OC to which DBRS gives credit is also consistent with a CPCA of BB (high). As such, everything else being equal, an assumed downgrade of the CBAP by one notch would have no impact on the ratings of the OBG. Everything else being equal, a downgrade of the CBAP by two notches 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 cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects, (3) the LSF Assessment associated with the Programme were downgraded, (4) the relative amortisation profile of the OBG and CP were to move adversely or (5) volatility in the financial markets were to cause 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 March 2016, the CP included EUR 4.5 billion of first economic ranking residential mortgage loans, EUR 281.7 million of commercial loans and EUR 138.9 million of cash, for a total CP amount of EUR 4.9 billion. There are 20 series outstanding under the Programme for a total of EUR 3.43 billion. The currently available total OC is 42.7%.

The CP comprises 59,499 residential mortgages and 1,773 commercial mortgages. The mortgages have all been originated by network banks that are part of the Carige group.

The weighted-average current loan-to-value of the mortgages is 47.1% with a seasoning of 6.6 years. The CP was mainly distributed between Northern Italy (67.5% by outstanding balance, with 40.7% in Liguria), Central Italy (24.4%) and Southern Italy (8.1%).

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 bases 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 4.0 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 OC.

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.” (March 2016) 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. A review of the legal documents was limited to the final terms of Series 597 and Series 598. 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’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 Carige 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 25 February 2016, when DBRS assigned ratings to Series 634 issued under the 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, Senior Vice President
Initial Rating Date: 23 November 2015
Initial Rating Committee Chair: Quincy Tang, Managing Director

Lead Analyst: Vito Natale, Senior Vice President
Rating Committee Chair: Quincy Tang, Managing Director

DBRS Ratings Limited
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London EC3M 3BY 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
-- 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
-- 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