DBRS Takes Rating Actions on Banca Monte dei Paschi di Siena Covered Bond Programme Guaranteed by MPS Covered Bond Srl

DBRS Ratings Limited (DBRS) has today placed Under Review with Negative Implications the A (high) ratings on all outstanding series of Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Monte dei Paschi di Siena SpA (BMPS or the Issuer) EUR 10,000,000,000 covered bond programme (BMPS OBG1 or the Programme) guaranteed by MPS Covered Bond Srl.

The rating actions follow the placement of the BMPS Long Term Critical Obligations rating (LT COR) and the Senior Long-Term Debt & Deposit rating Under Review with Negative Implications on 12 July 2016. For further information, please see the press release at www.dbrs.com.

Concurrently, DBRS has assigned the A (high), Under Review with Negative Implications, rating to the newly issued Series 20, Tranche 1. Series 20, Tranche 1 is a EUR 350 million floating-rate bond with a coupon linked to three-month Euribor + 0.8% and maturing in September 2019.

Including Series 20, there are 15 series of OBG for a total nominal amount of EUR 9.02 billion outstanding under the Programme.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (low), being the LT COR of BMPS. BMPS is the Issuer and the Reference Entity for the Programme.
-- DBRS Legal and Structuring Framework (LSF) Assessment of Very Strong associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest CPCA in line with the assigned LSF-Implied Likelihood (LSF-L).
-- A LSF-Implied Likelihood (LSF-L) of A (low).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- An Issuer-committed Asset Percentage of 83%, which translates into a contractually committed level of overcollateralisation (OC) of 20.48%.

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 DBRS “Rating European Covered Bonds” methodology, no forced asset liquidation has been modelled for this transaction given the conditional pass-through structure. Furthermore, DBRS has assumed several prepayment scenarios ranging between a 0% and 20% principal payment rate.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the covered bonds rating by one notch. In addition, the ratings of the covered bonds would be downgraded if any of the following occurs: (1) the quality and consistency of the cover pool (CP) were no longer sufficient to support a two-notch uplift for high recovery prospects or (2) the LSF Assessment associated with the Programme were downgraded to Average or below.

BMPS OBG1 has a conditional pass-through structure. In case of enforcement of the guarantee, the Guarantor is not contractually bound to pursue a forced asset sale of the CP in a distressed market environment. Notwithstanding this, the Guarantor can still attempt to liquidate the assets with a view to meeting its payment obligations on the pass-through series and on the earliest maturing covered bonds. In so doing, the Guarantor shall attempt to maintain the Programme’s OC proportionally to all asset sales. Additionally, the Programme documentation provides for the sale of the assets to take place only as long as the Amortisation Test (which sets the level of Asset Percentage in the transaction at 83%) is complied with before and after the sale. Should the Amortisation Test be breached, all series switch to pass-through payment on a pari passu and pro rata basis. DBRS has not modelled stresses on forced asset sales in its analysis because the Guarantor is not obliged to liquidate the assets.

The Bank of New York Mellon (Luxembourg) S.A., Italian Branch (rated AA (low) with a Stable trend by DBRS) and The Bank of New York Mellon – London Branch (rated AA with a Stable trend by DBRS) have replaced BMPS in its capacity as Italian and English account bank and they are compliant with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology. Commingling and set-off risk are mitigated by the computation of such risks in the asset coverage tests.

The total outstanding amount of OBG is EUR 9.02 billion (as of today), while the aggregate balance of loans (as of March 2016) in the CP is EUR 11.659 billion of residential mortgages plus EUR 630 million of cash, resulting in a total OC net of commingling and set-off of 33.2%.

As of the end of March 2016, the mortgage CP was comprised of 138,712 residential mortgages granted to individuals (92.81% of the mortgage CP notional is composed of borrowers classified as SAE 600) and other debtors of BMPS with an average loan amount of EUR 84,055. The mortgages have been originated by BMPS and other banks part of the BMPS group.

The weighted-average current loan-to-value of the mortgages was 52.7% with a seasoning of 6.3 years. The CP was mainly distributed between Northern Italy (39.31% by outstanding balance), Central Italy (39.82%) and Southern Italy (20.86%).

The CP is comprised of fixed loans (13% by outstanding balance) and floating-rate loans (87%). The non-fixed-rate mortgage loans are indexed to different plain vanilla bases and reset at different dates. Approximately 82.7% of OBG notional pays a fixed-rate coupon until the expected maturity and, if the maturity is extended, the relevant series becomes a pass-through series paying a floating rate plus a spread on a quarterly basis. DBRS has modelled interest rate risk mismatch in its cash flow analysis.

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 the cut-off date, the weighted-average life of the CP was 10.2 years based on a 0% pre-payment rate, which is longer than the 4.4 years weighted-average life on the OBG when taking into account the expected maturity. This risk is mitigated by the long Extendable Maturity Date, which falls 38 years after the Maturity Date.

DBRS has assessed the LSF related to the BMPS OBG1 as Very Strong according to its rating methodology. For more information, please refer to DBRS commentary “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” (July 2016). This can be found 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 operational risk review were not conducted. A review of the transaction legal documents was limited to the documentation pertaining to the issuance of Series 20. All the other documents have remained unchanged since the most recent rating action.

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

Other methodologies 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 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 not 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 24 June 2016, when DBRS assigned an A (high) rating to BMPS OBG1 Series 19.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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: Vito Natale, Senior Vice President
Initial Rating Date: 14 July 2015
Initial Rating Committee Chair: Quincy Tang, Managing Director

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

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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 analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375