DBRS Confirms BBB Ratings on Banca Carige S.p.A. Covered Bonds (OBG - Mortgages - Programme 1) and Removes Under Review with Negative Implications Status

DBRS Ratings Limited (DBRS) confirmed its 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., and removed the Under Review with Negative Implications (UR-Neg.) status.

This rating action takes into account 1) the recent completion of the bank’s capital increase; 2) the bank’s capital buffers as of December 2017; 3) the European Central Bank’s Supervisory Review and Evaluation Process capital requirements for 2018; 4) the bank’s ongoing restructuring plan; and 5) the bank’s still weak profitability prospects.

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 29.8% 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 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 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’ ratings.

In addition, all else unchanged, the ratings of the covered bonds would be downgraded if any of the following occurs: (1) the LSF assessment associated with the Programme were downgraded; (2) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (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.

BNP Paribas Securities Services SCA, Milan Branch acts as the Transaction Bank. The DBRS private ratings of such counterparty 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.

On 6 December 2017, BNP Paribas Securities Services SCA, Milan Branch was appointed as Transaction Bank, Principal Paying Agent and Cash Manager for the Programme, in place of Deutsche Bank AG, London Branch.

Credit Suisse International is the CP Swap Counterparty; however, the swap documentation is not aligned with DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology. Therefore, no credit was given to swaps in DBRS’s analysis.

The total outstanding amount of OBG is currently EUR 3.08 billion. The aggregate balance of the CP, as at 31 December 2017, was EUR 3.9 billion of residential (95%) and commercial (5%) mortgages plus EUR 329 million of cash, resulting in total OC of 32.0%.

The CP comprised 54,629 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 45.7% with an average seasoning of 6.9 years. The assets securing the loans in the CP are located predominantly in Liguria (40.1%), Tuscany (12.0%) and Lombardy (11.1%), Italy.

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, 57% of the liabilities pay a fixed rate and 43% pay a floating rate linked to 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 7.9 years, based on a 0% prepayment rate, whereas the WAL of the OBG is 4.0 years, 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 the OC.

DBRS has assessed the LSF related to the Programme 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.”

In DBRS opinion, the changes 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 documents relating to the appointment of BNP Paribas Securities Services SCA, Milan Branch as Transaction Bank, Principal Paying Agent and Cash Manager for the Programme, in place of Deutsche Bank AG, London Branch.

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 default 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 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 23 November 2017, when DBRS confirmed its BBB ratings on the Series outstanding under the Programme and maintained the UR-Neg. status.

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: 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
-- 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 CLOs Backed by Loans to European SMEs
-- Rating CLOs and CDOs of Large Corporate Credit
-- 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.