DBRS Assigns “A” Rating to Banco BPM Covered Bonds (OBG – Mortgages – Programme 1) Series 11

DBRS Ratings Limited (DBRS) assigned an “A” rating to Serie XI of Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banco BPM Covered Bonds Programme 1 (Banco BPM OBG1 or the Programme), which is guaranteed by BP Covered Bond S.r.l.

Concurrently, DBRS confirmed its “A” ratings on all other outstanding OBG under the Programme, and withdrew its ratings from Series I and Series VIII, which matured on 31 March 2017 and 30 September 2017, respectively.

As of today, including the newly issued series, there are six outstanding series of OBG, for a total nominal amount of EUR 5.25 billion under the Programme.

The ratings are based on the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) set at BBB (high), being the Long-Term Critical Obligations Rating (COR) of Banco BPM. Banco BPM is the Issuer and Reference Entity (RE) 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 to be strategic for the core activity of the Issuer.
-- A Legal and Structuring Framework (LSF) Assessment of “Adequate” associated with the Programme.
-- A LSF-Implied Likelihood (LSF-L) floored at BBB (high).
-- A two-notch uplift for high recovery prospects.
---A level of overcollateralisation (OC) of 17.5% to which DBRS gives credit, being the level considered to be sustainable based on discussions with the Issuer and expected market developments. DBRS gives limited credit to the cash portion of the cover pool (CP).

The transaction was analysed with DBRS’s European Covered Bond Cash Flow tool. 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.

In addition, all else unchanged, the covered bond (CB) ratings would be downgraded if 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.

Banco BPM acts as the transaction account bank. The replacement trigger on Banco BPM in its capacity as account bank is not fully compliant with DBRS’s counterparty criteria; hence, DBRS gives limited credit to the cash accumulating with the account bank in accordance with its “Rating European Covered Bonds” methodology.

Credit Suisse International is the Cover Pool Swap counterparty and UBS Limited and Credit Suisse International act as Covered Bonds Swap counterparties; however, the swap documentation is not fully compliant with DBRS’s derivatives criteria. As such, no credit was given to swap transactions in DBRS’s analysis.

The total outstanding amount of OBG including the newly issued series is EUR 5.25 billion.
The aggregate balance of the CP, as at 30 November 2017, was EUR 8.8 billion of residential mortgages plus EUR 2.2 billion of cash collections, resulting in a total OC of 78.7%.

As at November 2017, the CP comprised 106,450 loans secured by first rank mortgages, originated by Banco Popolare SC and network banks of the group.

The weighted-average current loan-to-value ratio of the mortgages was 53.8% with a seasoning of 7.1 years. The CP was mainly distributed in Lombardy (28.2%), Veneto (13.1%), Toscana (12.0%) and Emilia Romagna (12.0%).

The CP comprised fixed-for-life loans (25% by outstanding balance) and floating-rate loans (75%). The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset at different dates.

In comparison, 24% of the liabilities pay a fixed rate and 76% pay a floating rate linked to one- and three-month Euribor plus a spread. The resulting interest and basis risks are considered as unhedged 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 9.7 years, based on a 0% prepayment rate, whereas the WAL of the OBG is 2.2 years, including the newly issued series. This risk is partially mitigated by the 12-month maturity extension in case of an Issuer event of default and by the OC.

DBRS has assessed the LSF related to the Programme as “Adequate”, according to its rating methodology. 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”.

In DBRS 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 final terms of Serie XI.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf

The sources of data and information used for these ratings include historical performance data, loan-by-loan level 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 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 15 February 2017, when DBRS confirmed the ratings of the CB Series outstanding under the Programme at “A,” following the completion of 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 U.S. regulations only.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 15 February 2016

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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
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses 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 Sovereign Governments

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.