DBRS Maintains A (high) Ratings on BMPS CB1 Under Review with Negative Implications Following BMPS Downgrade

DBRS Ratings Limited (DBRS) has today maintained the Under Review with Negative Implications status on the A (high) ratings of the 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 10,000,000,000 covered bond programme (BMPS OBG1 or the Programme) guaranteed by MPS Covered Bond S.r.l.

Concurrently, DBRS has discontinued the ratings on Series 5, which matured on 15 September 2016. As of today, there are 14 series of OBG for a total nominal amount of EUR 7.77 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 Long Term Critical Obligations Rating (LT COR) of BMPS. BMPS is the Issuer and the Reference Entity for the Programme. BMPS LT COR is currently four notches above its Senior Long Term Debt and Deposit rating.

-- A Legal and Structuring Framework (LSF) Assessment of Very Strong assigned to 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).

-- An LSF-L of A (low).

-- A two-notch uplift for high recovery prospects.

-- An Issuer-committed Asset Percentage of 83%, which translates into a contractually committed level of overcollateralisation (OC) of 20.48%, to which DBRS gives full credit.

The ratings of BMPS OBG1 were placed under review on 18 July 2016, mirroring the review status on the issuer. DBRS has today maintained the under review status on the OBG as a consequence of DBRS’s action on the issuer. On 30 September 2016, BMPS’s Senior LT ratings were downgraded to B (high) from BB and the LT COR was maintained at BBB (low), all ratings remaining Under Review with Negative Implications.

The COR was not lowered reflecting DBRS’s expectation that, in the event of a resolution of the Bank, certain liabilities (such as payment and collection services, obligations as issuer of covered bonds, obligations under derivative agreements, etc.) are less likely to be bailed in and more likely to be included in a going-concern entity.

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. As a deviation from its “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% Prepayment 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, or (3) the CPCA were downgraded below BBB (low).

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 and The Bank of New York Mellon S.A./NV, London branch have replaced BMPS in its capacity as Italian and English account bank, respectively, 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 7.77 billion (as of today), while the aggregate balance of loans (as of June 2016) in the CP is EUR 11.20 billion of residential mortgages plus EUR 586 million of cash, resulting in a total pool amount of EUR 11.79 billion and an OC net of commingling and set-off of 48.0%.

As of the end of June 2016, the mortgage CP comprised 135,095 residential mortgages granted to individuals (92.8% 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 82,927. The mortgages have been originated by BMPS and other banks part of the BMPS group. An additional stress was associated with borrowers that were not classified as SAE 600.

The weighted-average current loan-to-value of the mortgages was 49.6% with a seasoning of 6.6 years. The CP is well distributed across Italy, with the highest concentrations in Tuscany (17.2%), Lazio (15.9%) and Veneto (14.1%).

The CP comprised fixed loans (12.6% by outstanding balance) and floating-rate loans (87.4%). The floating-rate mortgages are indexed to different plain vanilla bases and reset at different dates. 76.2% 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 and OBGs are denominated in euros. As such, investors are not currently exposed to any foreign exchange risk.

As of the cut-off date, the weighted-average life of the cover pool was 10.2 years based on a 0% pre-payment rate, which is longer than the 4.8 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.” This can be found at http://www.dbrs.com/about/methodologies.

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. All 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 Investor Reports and stratification information on the cover pool provided by the Issuer that allowed DBRS to further assess the portfolio. DBRS considers the information available to it for the purposes of providing these ratings 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 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 8 August 2016, when DBRS confirmed the ratings of BMPS CB1 following the completion of the annual review.

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

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

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: Vito Natale, Senior Vice President
Initial Rating Date: 23 September 2015
Initial Rating Committee Chair: Quincy Tang, Managing Director

Lead Surveillance Analyst: Alessandra Maggiora, Senior Financial Analyst
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 analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375