DBRS Places BBB (high) Ratings on Banca Carige S.p.A. Covered Bonds (OBG - Mortgages - Programme 1) Under Review with Negative Implications

DBRS Ratings Limited (DBRS) has today placed Under Review with Negative Implications the BBB (high) ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Carige S.p.A. Covered Bonds Programme (Carige OBG1, or the Programme) guaranteed by Carige Covered Bond S.r.l. The rating action follows the completion of a full review of the Programme.

As of today, there are twenty series of OBG with an aggregate nominal amount of EUR 3,430,500,000 outstanding under the Programme.

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).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 22% as expressed in the investor report and an OC to which DBRS gives credit of 30.7%, being the minimum observed in the last 12 months adjusted by a scaling factor of 0.93.

The ratings have been placed Under Review with Negative Implications following the receipt of updated performance information. Those justify, in DBRS’s view, a worsening of the base case default assumptions. When this worsening is compounded with the effect of both (1) potential changes involving the Issuer that could affect the CBAP (the strength of the Reference Entity as a primary source of payments for the covered bonds) and (2) a potential downgrade of the sovereign rating of the Republic of Italy, it may lead to a one-notch downgrade of the OBG ratings to BBB.

The CBAP takes into account the challenges facing the Reference Entity. Following a period of deposit outflow in the first quarter and a plan for dismissal of non-performing loans (NPLs) that has, in essence, been considered insufficient by the European Central Bank, the Reference Entity is expected to present an updated strategic and operational plan for the reduction of NPLs, including an assessment of the impacts in terms of capital adequacy. DBRS does not expect a one-notch downgrade of the Republic of Italy solely to trigger a downgrade of the CBAP.

The A (low) sovereign rating of the Republic of Italy was placed UR-N on 5 August 2016. The review was subsequently extended on 3 November 2016. The additional stresses that would be factored into DBRS’s analysis should the sovereign be downgraded to BBB (high) affect the Pass-OC level for the Programme and may eventually have an impact on the rating on the OBG if the level of OC to which DBRS can give credit is below the Pass-OC level.

DBRS notes, however, that both (1) a downgrade of the sovereign ratings of the Republic of Italy and (2) a downgrade of the CBAP would have to occur for the OBG to be downgraded.

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 (in the absence of a sovereign downgrade), whereas should the Republic of Italy be downgraded to BBB (high), an assumed downgrade of the CBAP by one notch would imply a downgrade of the covered bonds ratings by one notch.

DBRS is undertaking a review of the credit strength of the Reference Entity as well as of the Republic of Italy and will remove the covered bonds rating from this status as soon as it is appropriate.

The transaction was modelled using the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults, recoveries of the assets, interest rate stresses and market value spreads to calculate the liquidation values of the CP.

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.

The total outstanding amount of OBG is currently EUR 3.43 billion, while the aggregate balance of loans (as of September 2016) in the CP is EUR 4.41 billion of residential (94%) and commercial (6%) mortgages plus EUR 363 million of cash, resulting in a total OC of 34%.

As of September 2016, the CP comprised 58,358 mortgage loans originated by network banks that are part of the Carige group.

The weighted-average current loan-to-value of the mortgages was 46.9% with an average seasoning of 6.9 years. The assets securing the loan in the CP were located predominantly in Liguria (40.6%), Tuscany (12.0%) and Lombardy (10.9%).

The CP comprised 78% floating-rate mortgage loans, indexed to different plain vanilla bases and that reset at different dates. This compares to 14.6% of the liabilities paying a floating rate linked to Euribor plus a spread. The resulting interest and basis risks are hedged by a swap with Credit Suisse International; however, the swap documentation does not incorporate DBRS language. As such, no credit was given to swaps in DBRS’s analysis: this has been considered in DBRS’s cash flow modelling.

All CP assets and OBG are denominated in euros. As such, investors are currently not exposed to currency risk.

The weighted-average life of the cover pool is eight years, based on a 0% pre-payment rate, which is longer than the 3.5 years weighted-average life on the OBG, taking into account the expected maturity. This maturity-mismatch risk is partially mitigated by the 15-month maturity extension in case of an Issuer event of default, and by the level of overcollateralisation to which DBRS gives credit.

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

DBRS has assessed the LSF related to the Carige OBG1 as “Adequate” according to its rating methodology. For more information, please refer to DBRS’s “DBRS Assigns LSF Assessment to Italian Covered Bonds” and “Italian Covered Bonds Legal and Structuring Framework Review” commentaries, both available at www.dbrs.com.

The A (low) Long-Term Issuer Rating of the Republic of Italy was placed Under Review with Negative Implications on 5 August 2016. Should the Republic of Italy be downgraded to BBB (high), an assumed downgrade of the CBAP by one notch would imply a downgrade of the covered bonds rating by one notch.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating European Covered Bonds (July 2016). This can befound on www.dbrs.com at http://www.dbrs.com/about/methodologies.

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 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 performance data, loan-by-loan level and stratification information on the CP provided by the Issuer. DBRS considers the information available to it for the purposes of providing this rating to be 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 31 May 2016, when DBRS assigned BBB (high) ratings to Series 597 and Series 598 and confirmed the BBB (high) ratings on the other OBG rated by DBRS outstanding under the Programme.

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 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
Initial Rating Date: 23 November 2015
Initial Rating Committee Chair: Quincy Tang

Lead Surveillance Analyst: Antonio Laudani, 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)
-- 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
-- Rating CLOs and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European SMEs
-- 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.