DBRS Confirms Intesa Sanpaolo Covered Bonds Guaranteed by ISP OBG S.r.l. at A (high), Removes UR-Dev.

DBRS Ratings Limited (DBRS) has today confirmed its A (high) rating and removed 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 A (high) ratings assigned to ISP OBG reflect the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of “A”, 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 Adequate assigned to the Programme.
-- An LSF-Implied Likelihood (LSF-L) of “A”.
-- A one-notch uplift for good 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 of 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. In addition, the ratings of ISP OBG would be downgraded if the quality and consistency of the cover pool were no longer sufficient to support a one-notch uplift for good recovery prospects.

The ratings of ISP OBG were placed Under Review with Developing Implications on 23 August 2016 reflecting, on the one hand, the negative pressure coming from the Under Review with Negative Implications (UR-N) status of the LT-COR of the Issuer and, on the other hand, the positive impact of the finalisation of certain amendments to the swap documentation incorporating updated DBRS downgrade provisions. The swap amendments implied that, everything else being equal, the OBGs ratings may be subject to an upgrade of up to two notches, provided sufficient OC is in place.

On 20 January 2017, DBRS has downgraded the COR of ISP to “A” from A (high), which led to a downgrade of the LSF-L to A. The finalisation of the swap amendments, combined with higher stresses following the downgrade of Italy to BBB (high), allowed DBRS to consider one notch of uplift on the LSF-L for good recovery prospects.

Given the soft bullet nature of the programme, with a 12-month extension period, the sovereign downgrade to BBB (high) has triggered a downgrade of the LSF assessment to Adequate from the previous level of Strong. However, this did not have an impact on the ratings of the CB as the LSF-L is floored at the level of Intesa Sanpaolo COR.

As of today, there were 15 series outstanding for a total amount of EUR 21.9 billion. As of September 2016, the aggregate balance of loans in the CP was EUR 23.5 billion of residential and commercial mortgages (defaulted loans included), plus EUR 2.9 billion of cash collections (considering the principal component and reserve fund required amount), resulting in a total CP amount of EUR 26.4 billion and an estimated OC of 20.3%.

As of September 2016, the CP comprised 333,135 loans with an 85.7% residential versus a 14.3% non-residential split, based on the type of debtor, (debtors are considered “residential” when classified as SAE 600 according to Bank of Italy’s classification, and “non-residential” when classified as SAE other than 600, including 614 and 615, according to Bank of Italy’s classification).

The CP comprised fixed-rate (42.4%, of which 2.4% are optionally currently paying fixed rate) and floating-rate loans (56.7%, of which 8.9% are optionally 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 of the ISP OBG, linked to three-month Euribor plus a spread.

The interest rate risk in the transaction is hedged with swaps provided by ISP 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. The 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 are all OBGs. As such, investors are not currently exposed to any foreign exchange risk.

As of today, the WA life of the CP was roughly eight years, which is longer than the 3.8 years WA life of the OBGs 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 assessed the LSF related to the ISP OBG as Adequate 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 to the rating is: “Rating European Covered Bonds.” This can be found at http://www.dbrs.com/about/methodologies.

In DBRS’s opinion, the change(s) under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the cash flow analysis and probability of default assessment compatible with a BBB (high) rated sovereign.

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action. A review of the swap documentation was performed in August 2016, when DBRS put ISP OBG Under Review with Developing Implications

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 did not rely upon third-party due diligence in order to conduct its analysis. At the time of initial rating, DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 16 November 2016, when DBRS confirmed the A (high) UR-Dev ratings on ISP OBG following completion of the annual review.

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

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.

Lead Analyst: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 7 November 2014

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