DBRS Confirms A (high) Ratings of Banca Monte dei Paschi di Siena S.p.A. Covered Bonds Guaranteed by MPS Covered Bond S.r.l., Removes Under Review with Negative Implications Status

DBRS Ratings Limited (DBRS) confirmed the A (high) ratings of the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Monte dei Paschi di Siena SpA (BMPS or the Issuer) EUR 10,000,000,000 covered bond programme (BMPS OBG1 or the Programme) guaranteed by MPS Covered Bond S.r.l. and removed the Under Review with Negative Implications (UR-Neg.) status.

The action follows the conclusion of the review of the ratings of BMPS. Following the publication of the decree of the Italian Ministry of Finance for the implementation of the burden sharing and precautionary recapitalization of BMPS, DBRS has taken actions on the bank ratings. The Under Review status on the Critical Obligations Rating (COR) of BMPS, which is the Attachment Point for the ratings of BMPS CB1, has now been resolved. For more information on the ratings of BMPS, please see the BMPS press release at http://www.dbrs.com/research/315158/dbrs-upgrades-bmps-long-term-senior-debt-to-b-high-stable-trend.html.

As of today, there were 14 series of OBG outstanding under the Programme for a total nominal amount of EUR 8.92 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (low), being the Long-Term COR of BMPS. BMPS is the Issuer and the 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 CPCA in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-Implied Likelihood (LSF-L) of A (low).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A level of overcollateralisation (OC) of 24.1% to which DBRS gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.9, and an Issuer-committed Asset Percentage of 83.0%, corresponding to a level of committed OC of 20.5%.

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 DBRS “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 one-notch downgrade of the CBAP would lead to a one-notch downgrade of the covered bonds rating. In addition, the ratings of the covered bonds would be downgraded if any of the following were to occur: (1) The quality of the cover pool (CP) and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects, (2) the LSF Assessment associated with the Programme were downgraded to Average or below or (3) the CPCA were downgraded below BBB (low).

BMPS OBG1 has a conditional pass-through structure. In case of enforcement of the guarantee, the Guarantor is not contractually bound to pursue a forced asset sale of the CP in a distressed market environment. Notwithstanding this, the Guarantor can still attempt to liquidate the assets with a view to meeting its payment obligations on the pass-through series and on the earliest maturing covered bonds. In so doing, the Guarantor shall attempt to maintain the Programme’s OC proportionally to all asset sales. Additionally, the Programme documentation provides for the sale of the assets to take place only as long as the Amortisation Test (which sets the OC to a level of at least 75% of the OC resulting from the Asset Percentage used on the last Test Calculation Date preceding the service of a Guarantee Enforcement Notice) is complied with before and after the sale. Should the Amortisation Test be breached, all series switch to pass-through payment on a pari passu and pro rata basis. DBRS has not modelled stresses on forced asset sales in its analysis, because the Guarantor is not obliged to liquidate the assets.

The Bank of New York Mellon (Luxembourg) S.A., Milan Branch (rated AA with a Stable trend by DBRS) and The Bank of New York Mellon - London Branch (rated AA with a Stable trend by DBRS) have replaced BMPS in its capacity as Italian and English account bank, respectively, and they are compliant with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology. Commingling and set-off risk are mitigated by the computation of such risks in the asset coverage tests.

As of June 2017, the total CP balance was EUR 11.56 billion, including EUR 10.63 billion of mortgages and EUR 934 million of cash. As of today, there were EUR 8.92 billion covered bonds outstanding under BMPS OBG1 for a total OC of 26.8%, net of Commingling and Set-Off amounts.

As of June 2017, the mortgage CP comprised 130,380 mortgages backed by residential properties located in Italy. All mortgages have been originated by BMPS and other banks part of the BMPS group. A small portion of the pool (7.3% as of the end of May 2017) was granted to individuals not classified as SAE 600 by the Bank of Italy. DBRS received separate default data for these borrowers and calculated a stressed default rate.

The weighted-average (WA) current loan-to-value of the mortgages was 48.5% with a WA seasoning of 7.1 years. The CP is well distributed across Italy with the highest concentrations in Tuscany (17.4%), Lazio (16.0%) and Veneto (13.4%).

The CP comprised fixed-rate loans (13.2% by outstanding balance), floating-rate loans (83.3% by outstanding balance) and optional (currently fixed with the option of switch to floating or vice-versa, 3.5%). The floating-rate mortgages are indexed to different plain vanilla bases and reset at different dates. Approximately 66.4% of OBG notional pays a fixed-rate coupon until the expected maturity, and if the maturity is extended, the relevant series becomes a pass-through series paying a floating rate plus a spread on a quarterly basis. DBRS has modelled interest rate risk mismatch in its cash flow analysis.

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

As of 30 June 2017, the WA life of the CP was 9.7 years, which is longer than the 3.85 years WA life on the OBG when accounting for the expected maturity. This risk is mitigated by the long Extendable Maturity Date, which falls 38 years after the Maturity Date.

DBRS has assessed the LSF related to the BMPS OBG1 as Very Strong according to its rating methodology. For more information, please refer to DBRS commentary “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.

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.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found 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 data and information used for these ratings include loan-by-loan data, vintage data and stratification tables provided by the Issuer and payments reports provided by Securitisation Services. DBRS considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis. At the time of initial rating, DBRS was 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 8 August 2017, when DBRS confirmed the A (high) ratings on BMPS CB1 and maintained the Under Review with Negative implications status following a full review of the Programme.

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 and US regulations only.

Lead Analyst: Alessandra Maggiora, Senior Financial Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 23 September 2015

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
-- 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.