DBRS Maintains “A” Ratings on BMPS CB2 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” 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 20,000,000,000 covered bond programme (BMPS OBG2 or the Programme) guaranteed by MPS Covered Bond S.r.l. 2.

As of today, there were 19 series of OBG outstanding under the programme for a total nominal amount of EUR 10.2 billion.

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 Reference Entity for the Programme. BMPS LT COR is currently six notches above its Senior Long Term Debt and Deposit rating.
-- DBRS Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (low).
-- A one-notch uplift for good recovery prospects.
-- An Issuer-committed Asset Percentage of 86.2%, corresponding to a contractually committed level of overcollateralisation of 16%, to which DBRS gives full credit.

The ratings of BMPS OBG2 were initially 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 13 December 2016, BMPS’s Senior LT ratings were downgraded to B (low) from B (high) and placed Under Review with Developing Implications. The LT COR was maintained at BBB (low) 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 under a covered bond programme, payment and collection services, 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. In accordance with the “Rating European Covered Bonds” methodology, no forced asset liquidation has been modelled for this transaction given the conditional pass-through structure, and DBRS has assumed several prepayment scenarios, ranging between a 1% and 20% Prepayment Rate.

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.

In addition, the ratings of the Programme would be downgraded if any of the following occurs: (1) the quality and consistency of the cover pool were no longer sufficient to support a one-notch uplift for good recovery prospects, (2) the LSF Assessment of the Programme were downgraded to Average, or (3) the CPCA were to be downgraded below BBB (low).

Following an Issuer default, the maturities of all OBG are extended to the Long Due for Payment Date, 31 December 2057, and cash flows from the cover pool are allocated to all series on a pro rata and pari passu basis and distributed to OBG holders via a modified pass-through mechanism. According to such mechanism, monies are accumulated in an account opened by the guarantor with an eligible institution and paid out on the expected maturity date of each OBG. This implies negative carry that has been taken into account in the cash flow modelling.

The issuer performs several roles under the programme documents. According to DBRS’s “Legal Criteria for European Structured Finance Transactions,” a CBAP of BBB (low) is compatible, in DBRS’s view, with the issuer performing the role of account bank for the programme in association with the “A” ratings on the OBG, as well as the issuer not posting the potential set-off amount for the purpose of running the asset coverage test (item “Y” of the ACT formula), nor the Commingling Reserve Amount under the servicing agreement. The current CBAP of BBB (low) is also compatible with the Guarantor not yet appointing a Back-Up Servicer Facilitator under the provision of the servicing agreement. However, should the CBAP be lowered by one notch, and should the above-mentioned remedies not be actioned, or equivalent remedies not put in place, the covered bonds may be downgraded.

The OBG holders benefit from a reserve that is sufficient to cover senior costs and interest payments on the OBG for the subsequent six months’ rolling.

As of September 2016, the total CP balance was EUR 12.14 billion, including EUR 11.02 billion of mortgages and EUR 1.12 million of cash. As of today, there were EUR 10.2 billion covered bonds outstanding under BMPS OBG2, giving a total overcollateralisation of 19.0%.

As of September 2016, the mortgage CP comprised mortgages secured on residential properties (71.0%), as well as commercial properties (29%). The CP comprises 101,687 mortgages with a weighted-average (WA) current loan-to-value ratio of 41.37%. The pool is well seasoned, with a WA seasoning of 6.9 years, and geographically well diversified across Italy, with the top three regions for concentration being Tuscany (25.2%), Lazio (14.1%) and Lombardy (11.7%). As of June 2016, 17.9% of the pool was granted to employees of the Issuer and therefore is subject to additional stresses (see the rating report published on www.dbrs.com).

The reference rate of the underlying loans was split into floating-rate (72.6%) and fixed-rate mortgages (27.4%), while all OBG outstanding carry a floating coupon. As there are no hedge agreements in place, OBG holders are exposed to an interest rate mismatch, which has been taken into account in DBRS’s cash flow modelling.

All CP assets and liabilities are denominated in euros. As such, investors are not currently exposed to any foreign exchange risk.

As of September 2016, the weighted-average life of the CP was roughly eight years, which is longer than the 2.6 years weighted-average life on the OBG (as of today) when taking into account the expected maturity. This risk is mitigated by the Long Due for Payment Date, which falls on 31 December 2057.

DBRS has assessed the LSF related to BMPS OBG2 Programme as Very Strong, according to its rating methodology. For more information, please refer to DBRS commentaries “DBRS Assigns LSF Assessment to Italian Covered Bonds” and “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.

This is an event-driven rating action, and DBRS has not applied the principal methodology in full. A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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

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 4 November 2016, when DBRS assigned an “A” UR-Neg rating to Series 29 of BMPS CB2.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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: Valentina Cicerone, Vice President
Initial Rating Date: 3 September 2013
Initial Rating Committee Chair: Claire Mezzanotte, Managing Director

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