DBRS Assigns “A” UR-Neg Rating to Banca Monte dei Paschi di Siena S.p.A. Covered Bonds 2 Guaranteed by MPS Covered Bond S.r.l. 2, Series 26 Tranche 2 and Series 27 Tranche 2

DBRS Ratings Limited (DBRS) has today assigned an “A” rating to the Series 26 - Tranche 2 and to the Series 27 - Tranche 2 of 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 and has placed the ratings Under Review with Negative Implications.

Series 26 – Tranche 2 is a EUR 500 million tap issuance of the existing Series 26, indexed to Euribor 3M +0.85% and maturing in January 2021. Series 27 - Tranche 2 is a EUR 300 million tap issuance of the existing Series 27, indexed to Euribor 3M +0.85%, and maturing in April 2021. As with all other series under the Programme, both tap issuances will benefit from a maturity extension to the Long Due for Payment Date of 31 December 2057.

Concurrently, DBRS has maintained the Under Review with Negative Implications status on the “A” ratings of the other OBG outstanding under the Programme and has discontinued the rating on Series 11, which matured on 30 January 2017.

As of today, and including Series 26-2 and Series 27-2, there are 20 series of OBG outstanding under the Programme for a total nominal amount of EUR 10.2 billion. Series 26-2 and 27-2 will be merged into their respective Series on 14 March 2017.

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.
-- A 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 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 (CP) were no longer sufficient to support a one-notch uplift for good recovery prospects, (2) the LSF Assessment associated with the Programme were downgraded to Average or (3) the CPCA were downgraded below BBB (low).

DBRS has considered in its analysis the impact of the downgrade of the Republic of Italy to BBB (high) from A (low) that occurred on 13 January 2017. For further information on this rating action, please refer to the following press release: http://www.dbrs.com/research/304610/dbrs-downgrades-italy-to-bbb-high-stable-trend.html

Following an Issuer default, the maturities of all OBG are extended to the Long Due for Payment Date, and cash flows from the CP 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 and 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 as low as BBB (low) is compatible, in DBRS’s view, with the Issuer’s performing the role of account bank for the Programme in association with the “A” ratings on the OBG, as well as the Issuer’s 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’s 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 December 2016, the total CP balance was EUR 12.14 billion, including EUR 10.61 billion of mortgages and EUR 1.53 million of cash. As of today, there are EUR 10.2 billion covered bonds outstanding under BMPS OBG2, giving a total overcollateralisation of 19.0%.

As of December 2016, the mortgage CP comprised mortgages secured on residential properties (70.2%), as well as commercial properties (29.8%). The CP comprises 99,439 mortgages with a weighted-average (WA) current loan-to-value ratio of 41.4% (September 16). The pool is well seasoned, with a WA seasoning of 6.8 years (September 16), and geographically well diversified across Italy, with the top three regions for concentration being Tuscany (25.6%), Lazio (13.7%) and Lombardy (11.7%). As of September 2016, 21.4% 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 (78.5%) and fixed-rate mortgages (21.5%), 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 WA life of the CP was 8.3 years, which is longer than the 2.7-year WA life on the OBG 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 the BMPS OBG2 Programme as Very Strong, according to its rating methodology. For more information, please refer to the 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 to the rating 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.

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.

A review of the transaction legal documents was limited to the documentation pertaining to the issuance of Series 26-Tranche 2 and Series 27-Tranche 2. All the other 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. 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 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 considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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 19 December 2016, when DBRS maintained the “A” ratings on BMPS CB2 Under Review with Negative Implications following the downgrade of BMPS’s long-term ratings.

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.

Lead Analyst: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 3 September 2013

DBRS Ratings Limited
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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 SMEs
-- Unified Interest Rate Model Methodology for European Securitisations
-- The Effect of Sovereign Risk on Securitisations in the Euro Area

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.