DBRS Confirms BBB Ratings on Banca Carige S.p.A. Covered Bonds Programme 1, Maintains Under Review with Negative Implications Status

DBRS Ratings Limited (DBRS) confirmed the BBB ratings on 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 OBG1 or the Programme), guaranteed by Carige Covered Bond S.r.l. The rating action follows the completion of a full review of the Programme.

Concurrently, DBRS maintained the Under Review with Negative Implications (UR-Neg) status on the BBB ratings of all the OBG outstanding under the Programme. There are currently 20 series of Carige OBG1 outstanding under the Programme, with a nominal amount of EUR 3.08 billion.

The ratings reflect 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 is the Issuer and RE for the Programme. There is no Critical Obligations Rating associated with the RE and DBRS does not currently classify the Republic of 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 BB, which is the lowest CPCA in line with the final LSF-Implied Likelihood (LSF-L).
-- An LSF-L of BB (high).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 22%, as expressed in the investor report, and the 31% OC to which DBRS gives credit, equal to the minimum observed in the last 12 months, adjusted by a scaling factor of 0.93.

The ratings of Carige OBG1 are 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 particularly reflects the execution risk linked to the Issuer’s pending recapitalisation.

The transaction was analysed using the DBRS European Covered Bond Cash Flow Tool. 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 on the CP.

Everything else being equal, a two-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’ ratings.

In addition, the ratings of the covered bonds would be downgraded if any of the following occurs: (1) the quality and consistency of the CP were no longer sufficient to support a two-notch uplift for high recovery prospects, (2) the LSF Assessment associated with the Programme were downgraded, (3) the relative amortisation profile of the OBG and CP were to move adversely or (4) volatility in the financial markets were to cause the currently estimated market value spreads to increase.

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

Credit Suisse International is the CP Swap Counterparty; however, the swap documentation does not incorporate DBRS rating triggers. As such, no credit was given to swaps in DBRS’s analysis.

The total outstanding amount of OBG is currently EUR 3.08 billion while the aggregate balance of loans (as at September 2017) in the CP was EUR 4.04 billion of residential (95%) and commercial (5%) mortgages plus EUR 240 million of cash, resulting in total OC of 34%.
The CP comprised 55,906 mortgage loans originated by network banks that are part of the Banca Carige Group.

The weighted-average current loan-to-value of the mortgages was 46.1% with an average seasoning of 6.5 years. The assets securing the loans in the CP are located predominantly in Liguria (40.1%), Tuscany (12.0%) and Lombardy (11.2%), Italy.

The CP comprises 75% floating-rate mortgage loans, indexed to different plain-vanilla bases, which reset at different dates. This compares with 43% of the liabilities paying a floating rate linked to Euribor plus a spread. The resulting interest and basis risks are hedged by a swap with Credit Suisse International; however, the swap documentation does not incorporate DBRS rating triggers. Therefore, no credit was given to swaps in DBRS’s analysis, which has been considered in DBRS’s cash flow analysis.

The weighted-average life of the CP is about 7.9 years based on a 0% prepayment rate, which is longer than the 4.2 years weighted-average life on the OBG, taking into account the expected maturities. This maturity-mismatch risk is partially mitigated by the 15-month maturity extension in case of an Issuer event of default and by 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 OBG1 as “Adequate,” according to its “Rating European Covered Bonds” methodology. 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.

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 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.

At the time of the initial rating, DBRS was 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 28 September 2017, when DBRS maintained the Under Review with Negative Implications status on the BBB ratings of Carige OBG1.

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

These 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: 23 November 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 Methodology 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.