DBRS Assigns A (low) Under Review with Negative Implications Rating to Banca Carige S.p.A. Covered Bonds (OBG - Mortgages - Programme 2)

DBRS Ratings Limited (DBRS) assigned a rating of A (low) to the obbligazioni bancarie garantite (OBG; the Italian legislative covered bonds) issued under the EUR 5,000,000,000 Banca Carige S.p.A. Covered Bonds Programme (Carige OBG2 or the Programme), guaranteed by Carige Covered Bond 2 S.r.l., placing it Under Review with Negative Implications (UR-Neg).

Series 635 is the only series of Carige OBG2 currently outstanding under the Programme, with a nominal amount of EUR 350 million.

The rating reflects the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) reflective of the likelihood that the source of payments will switch from the Reference Entity (RE) to the cover pool (CP). Banca Carige S.p.A. (Carige) is the Issuer and RE for the Programme. There is no Critical Obligations Rating associated with the RE, nor does DBRS currently classify Italy as a jurisdiction for which covered bonds are a particularly important financing tool.
-- A Legal and Structuring Framework (LSF) Assessment of Adequate associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of AA (low), being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of BBB.
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 85% to which DBRS gives credit, being the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.90.

The rating of Carige OBG2 has been placed UR-Neg because of potential changes involving the Issuer that could affect the CBAP (i.e., the strength of the RE as a primary source of payments for the covered bonds). The UR-Neg status reflects in particular the execution risk linked to the Issuer’s pending recapitalisation.

The transaction was modelled using 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. 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.

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.

In addition, everything else being equal, the CB rating would be downgraded if any of the following were to occur: (1) the CPCA were downgraded below AA (low); (2) the LSF assessment associated with the Programme were downgraded; or (3) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.

Following an Issuer default, and if there are no sufficient funds to redeem in full any OBG Series at the relevant Maturity Date, such a Series becomes payable according to a pass-through structure, and its maturity is automatically extended up to the relevant Extended Maturity Date.

Series 635, the only Series currently outstanding under the Programme, has a maturity date extendable by 35 years.

BNP Paribas Securities Services, London Branch acts as Transaction Bank and Cash Reserve Account Bank. The DBRS private ratings of BNP Paribas Securities Services, London Branch comply with the threshold for the Account Bank, given the rating assigned to the OBG, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” and “Rating European Covered Bonds” methodologies.

The total outstanding amount of OBG is currently EUR 350 million while the aggregate balance of loans (as at September 2017) in the CP was EUR 652 million of commercial mortgages plus EUR 77 million of cash, resulting in a total OC of 94%.

As at September 2017, the CP comprised 2,601 commercial mortgage loans originated by network banks that are part of the Banca Carige Group.

The weighted-average current loan-to-value of the mortgages is 35.0% with an average seasoning of 7.2 years. The assets securing the loans in the CP are located predominantly in Liguria (41.3%), Tuscany (17.1%) and Emilia Romagna (10.6%).

The CP comprises 89.9% floating-rate mortgage loans, indexed to different plain vanilla bases, which reset at different dates. This compares with 100% of the liabilities paying a floating rate linked to three-month Euribor plus a spread. The resulting interest and basis risks are not hedged.

The weighted-average life of the CP is about 9.9 years based on a 0% prepayment rate, which is longer than the 3.3 years weighted-average life on the OBG, taking into account the expected maturity. This maturity-mismatch risk is partially mitigated by the 35-year maturity extension and by the OC.

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

DBRS has assessed the LSF related to the Carige OBG2 as Adequate, according to its “Rating European Covered Bonds” methodology. The Programme’s adherence to the Italian OBG Law and a 35-year maturity extension within a conditional pass-through structure, combined with a three-month dynamic cash reserve, contribute to the Adequate LSF assessment for this Programme. For more information, please refer to the DBRS commentary “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework” on www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable 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.

DBRS is undertaking a review and will remove these ratings 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 data and information used for these ratings include historical default performance data, loan-by-loan-level information and stratification tables on the CP provided by the Issuer.

DBRS did 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 data and 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.

This is the first DBRS rating on this financial instrument.

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

This ratings are 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 and US regulations only.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 13 November 2017

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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
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model Methodology for European Securitisations
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating CLOs Backed by Loans to European SMEs
-- Rating CLOs and CDOs of Large Corporate Credit
-- 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.