DBRS Upgrades Banca Carige S.p.A. Covered Bonds (OBG - Mortgages - Programme 2) to A (low)

DBRS Ratings Limited (DBRS) upgraded to A (low) from BBB (high) its rating 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 OBG2 or the Programme), guaranteed by Carige Covered Bond 2 S.r.l.

This rating action takes into account the updated assessment of the Republic of Italy, which is now considered among those European jurisdictions for which covered bonds (CB) are a systemically important financing instrument (see https://www.dbrs.com/research/326989/dbrss-assessment-of-european-jurisdictions-for-which-covered-bonds-are-systemically-important published on 4 May 2018).

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 S.p.A. (Carige) is the Issuer and RE for the Programme. There is no Critical Obligations Rating associated with the RE, but DBRS currently classifies Italy as a jurisdiction for which CB 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 committed minimum overcollateralisation (OC) of 32%, as expressed in the investor report, and the 76.6% OC to which DBRS gives credit, equal to the minimum observed in the last 12 months, adjusted by a scaling factor of 0.90.
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 and interest rate stresses. In accordance with the DBRS “Rating European Covered Bonds” methodology, no forced asset liquidation has been considered 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 CB rating.

In addition, all else unchanged, 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 SCA, London Branch acts as the Transaction Bank and Cash Reserve Account 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.

The total outstanding amount of OBG is currently EUR 350 million. The aggregate balance of the CP, as at 31 March 2018, was EUR 588 million of commercial mortgages plus EUR 108 million of cash, resulting in total OC of 85.1%.

The CP comprised 2,467 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 32.0% with an average seasoning of 7.3 years. The assets securing the loans in the CP are located predominantly in Liguria (43.3%), Tuscany (17.3%) and Emilia-Romagna (7.8%), Italy.

The CP comprised fixed-for-life loans (10% by outstanding balance) and floating-rate loans (90%). The floating-rate mortgage loans are indexed to different plain-vanilla indices and reset 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 not hedged. This has been taken into account 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 9.9 years, based on a 0% prepayment rate, whereas the WAL of the OBG is 2.8 years, taking into account the expected maturity. The resulting asset-liability maturity mismatch is mitigated by the 35-year maturity extension and by the OC.

The current LSF Assessment of Adequate continues to be in line with the conditional pass-through nature of the programme, with a 35-year maturity extension combined with a three-month dynamic cash reserve, the assets being commercial mortgage loans. 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 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 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 “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-sovereigngovernments.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 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 20 February 2018, when DBRS downgraded to
BBB (high) from of A (low) its rating on Series 635, outstanding under the Programme, removing the
Under Review with Negative Implications (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/cerepweb/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
-- Interest Rate Stresses for European Structured Finance Transactions
-- 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.