DBRS Confirms “A” Ratings on Unione di Banche Italiane S.p.A. Covered Bonds (OBG - Mortgages - Programme 2)

DBRS Ratings Limited (DBRS) confirmed its “A” ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Unione di Banche Italiane S.p.A. Covered Bonds Programme 2 (UBI OBG2 or the Programme), which is guaranteed by UBI Finance CB2 S.r.l. The rating action follows the completion of a full review of the Programme.

As of today, there are five series of OBG outstanding under the Programme, for a total nominal amount of EUR 2.01 billion.

The ratings are based on the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of “A”, being the Long-Term Critical Obligations Rating of Unione di Banche Italiane S.p.A. (UBI). UBI is the Issuer and Reference Entity for the Programme. DBRS does not classify Italy as a jurisdiction in which covered bonds are a particularly important funding instrument; however, DBRS deems the cover assets strategic for the core activity of the Issuer.
-- A Legal and Structuring Framework (LSF) Assessment of Modest associated with the Programme.
-- A LSF-Implied Likelihood (LSF-L) floored at “A”.
-- No recovery uplift.
-- No committed overcollateralisation (OC). The minimum observed OC level during the past 12 months is 34.9%. However, based on discussions with the issuer and expected market developments, DBRS gives no credit to the observed OC.

The transaction was analysed with the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets and interest rate stresses.

Everything else being equal, a one-notch downgrade of the CBAP would lead to a one-notch downgrade of the LSF-L, resulting in a one-notch downgrade of the covered bonds rating.
BNP Paribas Securities Services, London Branch, acts as the English account bank and qualifies as an eligible institution in accordance with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology. No swaps are contemplated under the Programme.

The total outstanding amount of OBG is EUR 2.01 billion, while the aggregate balance of loans (as at 31 August 2017) in the cover pool (CP) is EUR 3.05 billion of residential (43%) and commercial (57%) mortgages plus EUR 48 million of cash, resulting in a total OC of 54.1%.

As at August 2017, the CP comprised 27,586 mortgage loans originated by network banks of the UBI group. The weighted-average current loan-to-value ratio of the mortgages was 38.4% with a seasoning of 7.6 years. The CP was mainly distributed in Lombardy (46.5%), Piedmont (10.6%) and Lazio (6.9%).

The CP comprised fixed-for-life loans (11% by outstanding balance) and floating-rate loans (89%), indexed to a different plain-vanilla basis and resetting at different dates. In comparison, 100% of the liabilities pay a floating rate linked to three month Euribor plus a spread. The resulting interest and basis risks are unhedged. This has been considered in DBRS’s cash flow analysis.

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 (WAL) of the CP is 6.2 years, whereas the WAL of the OBG is 3.0 years. This maturity-mismatch risk is partially mitigated by the 12-month maturity extension in case of an Issuer event of default and by the uncommitted overcollateralisation.

DBRS has assessed the LSF related to the UBI OBG2 as Modest, according to its rating methodology. The LSF assessment has been downgraded to Modest from the previous level of Average following the downgrade on the rating of the Republic of Italy to BBB (high), which occurred on 13 January 2017. For more information, please refer to the DBRS commentary “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework” found at www.dbrs.com.

For further information on the Programme, please refer to the rating report that is available on www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Covered Bonds.”

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal 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 the 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 historical performance data, loan-by-loan level data and stratification information on the CP provided by the Issuer.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing these ratings 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 27 October 2016, when DBRS confirmed the ratings of the CB Series outstanding under UBI CB2 at “A”, following the annual 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 U.S. regulations only.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 27 October 2015

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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
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- 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
-- 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.