DBRS Assigns BBB (high) UR-Neg. Rating to Banca Carige S.p.A. Covered Bonds (OBG - Mortgages - Programme 1) Series 636 Guaranteed by Carige Covered Bond S.r.l.

DBRS Ratings Limited (DBRS) has today assigned a rating of BBB (high) to the Series 636 Obbligazioni Bancarie Garantite (OBG, i.e. the Italian legislative Covered Bonds) issued under the EUR 5,000,000,000 Banca Carige S.p.A. Covered Bonds Programme (Carige OBG1, or the Programme) guaranteed by Carige Covered Bond S.r.l., and has placed the rating Under Review with Negative Implications (UR-Neg.). The Series 636 OBG is a EUR 830 million floating-rate OBG, paying a coupon of 3-month Euribor +1.5%, maturing on 25 January 2022.

Concurrently, DBRS has maintained the Under Review with Negative Implications status on the BBB (high) rating on the other OBG rated by DBRS which are outstanding under the Programme. Following the issuance of the Series 636 OBG, there are 20 series of OBG for a nominal amount of EUR 3.1 billion outstanding under the Programme.

The ratings reflect 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 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.

The transaction was modelled using 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 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, following the issuance of the Series 636, is currently EUR 3.1 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 49.2%.

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 43.2% 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 not currently exposed to any foreign exchange risk.

The weighted-average life of the cover pool is eight years, based on a 0% prepayment rate, which is longer than the 5.2 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 assessed the LSF related to the Carige OBG1 as Adequate, according to its rating methodology. For more information, please refer to the DBRS commentary, “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework,” 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.

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

In DBRS’s 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’s legal documents was limited to the documentation pertaining to the issuance of the Series 636. All the other 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. This may be found 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 found at 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 this rating to be of satisfactory quality.

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 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 23 November 2016, when DBRS placed Under Review with Negative Implications the BBB (high) ratings on the OBG rated by DBRS, outstanding under the Programme, upon completion of the annual review.

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

Lead Surveillance Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Senior Vice President

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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.