DBRS Confirms A (high) Ratings of Intesa Sanpaolo S.p.A. Covered Bonds Guaranteed by ISP OBG S.r.l., Maintains Under Review with Developing Implications

DBRS Ratings Limited (DBRS) has today confirmed the A (high) ratings and maintained the Under Review with Developing Implications (UR-Dev.) status on 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. The action follows the completion of the annual review of the Programme.

The A (high) UR-Dev. 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) to which DBRS gives full credit.

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 (CP).

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.

The ratings of ISP OBG were placed Under Review with Developing Implications on 23 August 2016 following, 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 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, there are 15 series outstanding for a total amount of EUR 21.9 billion. As of June 2016, the aggregate balance of loans in the CP was EUR 24.3 billion of residential and commercial mortgages (defaulted loans included), plus EUR 3.1 billion of cash collections (considering principal component and reserve fund required amount), resulting in an estimated OC of 24.9%.

As of June 2016, the CP comprised 341,404 loans with an 85.6% residential versus a 14.4% non-residential split, based on the type of debtor, being an individual (SAE 600 only as per 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 CP has a weighted-average (WA) current loan-to-value of 44.1% and a WA seasoning of 6.9 years. The mortgages have been originated by ISP and network banks that are part of the ISP group. The CP is geographically well distributed, with higher concentrations in Lombardy (18.1%), Apulia (13.0%) and Veneto (12.6%).

The CP comprised fixed-rate (42.2%, of which 2.45% are optional currently paying fixed rate) and floating-rate loans (56.9%, of which 8.9% are optional currently paying floating rate), as well as balanced mortgages (0.9%). The floating-rate mortgage loans are indexed to different plain vanilla bases and reset at different dates. This compares to 100.0% floating-rate liabilities linked to three-month Euribor plus a spread.

The interest rate risk in the transaction is hedged with swaps with Intesa Sanpaolo S.p.A. and other banks of the group (Banco di Napoli S.p.A., Carisbo S.p.A, Banca CRF S.p.A. and Cassa di Risparmio del Veneto S.p.A.) on their respective portfolios. Swap documentation embeds DBRS derivatives criteria and DBRS has taken swaps into account in its cash flow analysis.

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 today, the WA life of the CP is roughly eight years, which is longer than the 4.0 years WA life of the OBG calculated taking into account the expected maturity. This risk is partially mitigated by the 12-month maturity extension in case of an Issuer event of default and by the OC.

DBRS has applied its new Structured Credit methodology, published on 19 July 2016, to perform the analysis of the non-residential portion of the pool. For further information, please see “Rating CLOs Backed by Loans to European SMEs.”

DBRS has assessed the LSF related to the ISP OBG as Strong according to its rating methodology. For more information, please refer to the 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.” 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.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology. A review of the transaction legal documents was not conducted as the 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.

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 loan by loan data 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 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 16 September 2016, when DBRS assigned A (high) UR-Dev ratings to Series 21 and 22 of ISP OBG.

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: Valentina Cicerone, Vice President
Initial Rating Date: 7 November 2014
Initial Rating Committee Chair: Claire Mezzanotte, Managing Director

Lead Surveillance Analyst: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Senior Vice President

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