DBRS Places Intesa Sanpaolo S.p.A. Covered Bonds Guaranteed by ISP OBG S.r.l. Under Review with Developing Implications

DBRS Ratings Limited (DBRS) has today placed Under Review with Developing Implications (UR-D) the A (high) ratings of the Obbligazioni Bancarie Garantite (OBG, the Italian legislative Covered Bonds) issued under the Intesa Sanpaolo S.p.A. (ISP or the Issuer) EUR 30,000,000,000 covered bond programme (ISP OBG or the Programme) guaranteed by ISP OBG S.r.l.

Concurrently, DBRS has discontinued the rating Series 8 OBG, repaid on 20 August 2016. There are 13 series of OBG for a nominal amount of EUR 18.435 billion currently outstanding under the programme.

The A (high) ratings assigned to ISP OBG reflect the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high), being the Long-Term Critical Obligations Rating (LT-COR) of ISP. ISP is the Issuer and Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) Assessment of Strong assigned to the Programme.
-- An LSF-Implied Likelihood (LSF-L) of A (high).
-- No uplift for recovery prospects.
-- A committed asset percentage of 94.5%, equivalent to 5.82% of overcollateralisation (OC).

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.

The UR-D placement status follows, on the one hand, the Under Review with Negative Implications (UR-N) placement status of the LT-COR of the Issuer on 11 August 2016 and, on the other hand, the finalisation of certain amendments to the swap documentation which incorporate updated DBRS downgrade language. The review of the Issuer’s ratings is driven by DBRS’s rating action on the Republic of Italy. On 5 August 2016, DBRS placed the Republic of Italy’s A (low) ratings Under Review with Negative Implications.

The swap amendments imply that, everything else equal, the CBs ratings may be subject to an upgrade of up to two notches, provided sufficient OC is in place. The OC deemed sufficient is dependent, among other factors, on the Italian sovereign rating (see DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary available on www.dbrs.com). The UR-N status on the LT-COR of the Issuer exercises negative pressure on the OBG ratings. Everything else equal, a downgrade of the Issuer’s LT-COR by one notch would cause a one-notch downgrade on the OBG ratings. As a result, both the direction and the magnitude of an assumed rating action on the OBG is uncertain.

As of today the total outstanding amount of OBG is EUR 18.435 billion. As of the end of March 2016, the aggregate balance of loans in the cover pool (CP) was EUR 21.59 billion of residential and commercial mortgages (defaulted loans included), plus EUR 3.303 billion of principal cash collections, resulting in a total OC of 27.1%.

As of 31 March 2016, the CP comprised 306,866 loans. The mortgages have been originated by network banks that are part of the ISP group.

The weighted-average current loan-to-value of the mortgages was 46.65% with a seasoning of 7.3 years. The CP was mainly distributed in Lombardy (23.7%), Apulia (18.3%) and Campania (11.2%) by original outstanding balance.

The CP comprised fixed-rate (40.5% by original outstanding balance) and floating-rate loans (59.5%). Such a percentage includes optional loans currently featuring, respectively, a fixed-rate and a floating-rate coupon. 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 are all OBG. As such, investors are not currently exposed to any foreign exchange risk.

The weighted-average life of the cover pool is longer than the weighted-average life of the OBG. This risk is partially mitigated by the 12-month maturity extension in case of an Issuer event of default and by the overcollateralisation.

DBRS has assessed the LSF related to the ISP OBG as Strong according to its rating methodology. Given the soft bullet nature of the programme, with a 12-month extension period, a hypothetical sovereign downgrade to BBB (high) would trigger a downgrade of the LSF assessment to Adequate from the current level of Strong. By itself, this would not affect the OBG ratings. For more information, please refer to DBRS’s “Italian Covered Bonds Legal and Structuring Framework Review” commentary, available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted. The principal methodology applicable is:
Rating European Covered Bonds.

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

In DBRS opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, an asset analysis was not conducted.

A review of the transaction legal documents was limited to an amendment agreement to the Collateral Security Agreement, an amendment agreement to the ISDA Master agreement and ISDA Schedule and an unwinding agreement relating to the cover pool of Banca dell’Adriatico. Banca dell’Adriatico was merged into Intesa Sanpaolo S.p.A. on 16 May 2016. All the other transaction documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the 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 this rating include historical default performance data, loan-by-loan level as well as stratification information on the cover pool 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 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 to be 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 17 June 2016, when DBRS assigned an A (high) rating to Series 20 and confirmed the A (high) ratings on all outstanding OBG.

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

This rating is Under Review with the Developing Implications designation. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. However, this time DBRS anticipates a lengthy UR-Dev. period, which will be resolved only once the UR-Neg. status of the sovereign rating as well as the Issuer LT-COR has been resolved. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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, Senior Vice President
Rating Committee Chair: Quincy Tang, Managing Director

DBRS Ratings Limited
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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

-- 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