DBRS Assigns “A” Ratings to Banca Monte dei Paschi di Siena S.p.A. Covered Bonds (OBG - Mortgages - Programme 2) Series 30 and Series 31

DBRS Ratings Limited (DBRS) assigned ratings of “A” to Series 30 and Series 31 of the Obbligazioni Bancarie Garantite (OBG, the Italian legislative Covered Bonds) issued under the Banca Monte dei Paschi di Siena S.p.A. (BMPS or the Issuer) EUR 20,000,000,000 covered bond programme (BMPS OBG2 or the Programme) guaranteed by MPS Covered Bond S.r.l. 2.

Each series is a EUR 350 million floating-rate bond indexed to three-month Euribor plus 0.85%. Series 30 will mature in January 2022 and Series 31 will mature in April 2022. As with all other series under the Programme, both issuances will benefit from a maturity extension to the Long Due for Payment Date of 31 December 2057.

At the same time, DBRS has discontinued the ratings on Series 14, Series 15 and Series 16 as they were all repaid at their maturity, and confirmed its “A” ratings of the other OBG outstanding under the Programme.

As of today, and including Series 30 and 31, there were 15 series of OBG outstanding under the Programme for a total nominal amount of EUR 8.5 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (low), being the Long-Term Critical Obligations Rating (LT COR) of BMPS. BMPS is the Issuer and Reference Entity for the Programme. DBRS classifies Italy as a jurisdiction in which covered bonds are a particularly important funding instrument and deems the cover pool strategic for the core activity of the Issuer.
-- A Legal and Structuring Framework (LSF) Assessment of “Very Strong” associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB (low), being the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (low).
-- A one-notch uplift for good recovery prospects.
-- A level of overcollateralisation (OC) of 21.2% to which DBRS gives credit, being the minimum level observed in the last 12 months adjusted by a scaling factor of 0.9. BMPS commits to a maximum asset percentage (AP) of 86.2%, which translates into a contractually committed level of overcollateralisation of 16%.

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. In accordance with DBRS’s “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, ranging between a 1% and 20% Prepayment Rate.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch.

In addition, the ratings of the Programme would be downgraded if any of the following were to occur: (1) the quality of the cover pool (CP) and the level of OC were no longer sufficient to support a one-notch uplift for good recovery prospects, (2) the LSF Assessment associated with the Programme were downgraded to Average or (3) the CPCA were downgraded below BBB (low).

Following an Issuer default, the maturities of all OBG are extended to the Long Due for Payment Date and cash flows from the CP are allocated to all series on a pro rata and pari passu basis and distributed to OBG holders via a modified pass-through mechanism. According to such mechanism, monies are accumulated in an account opened by the guarantor with an eligible institution and paid out on the expected maturity date of each OBG. This implies negative carry and has been taken into account in the cash flow modelling.

The Issuer performs several roles under the Programme documents. According to DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology, a CBAP as low as BBB (low) is compatible, in DBRS’s view, with the Issuer’s performing the role of account bank for the Programme in association with the “A” ratings on the OBG.

The OBG holders benefit from a reserve that is sufficient to cover senior costs and interest payments on the OBG for the subsequent six months rolling.

As of March 2018, the total CP balance was EUR 10.74 billion, including EUR 9.17 billion of mortgages and EUR 1.57 million of cash. As of today, there are EUR 8.5 billion covered bonds outstanding under BMPS OBG2, giving a total overcollateralisation of 26.4%.

As of March 2018, the mortgage CP comprised mortgages secured on residential properties (74.3%), as well as commercial properties (25.7%). The CP comprises 92,860 mortgages with a weighted-average (WA) current loan-to-value ratio of 40.9%. The pool is well seasoned, with a WA seasoning of 7.9 years and geographically well diversified across Italy, with the top three regions for concentration being Tuscany (25.5%), Lazio (14.4%) and Lombardy (12.2%).

The reference rate of the underlying loans was floating-rate (76.9%) and fixed-rate (23.15%), while all OBG outstanding carry a floating coupon. As there are no hedging agreements in place, OBG holders are exposed to an interest rate mismatch, which has been taken into account in DBRS’s cash flow modelling.

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

As of March 2018, the WA life of the CP was 8.3 years, which is longer than the 2.1-year WA life on the OBG when taking into account the expected maturity. This risk is mitigated by the Long Due for Payment Date, which falls on 31 December 2057.

DBRS has assessed the LSF related to the BMPS OBG2 Programme as “Very Strong”, according to its rating methodology. For more information, please refer to the DBRS commentaries “DBRS Assigns LSF Assessment to Italian Covered Bonds” and “Italian Covered Bonds: Legal and Structuring Framework Review,” available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Rating European Covered Bonds”. This can be found at http://www.dbrs.com/about/methodologies.

In DBRS’s 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 documentation pertaining to the issuance of Series 30 and 31. All the other 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-sovereign-governments.pdf.

The sources of data and information used for these ratings include Investor Reports and stratification information on the cover pool provided by the Issuer that allowed DBRS to further assess the portfolio. DBRS considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS did not rely upon third-party due diligence in order to conduct its analysis. At the time of initial rating, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

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 25 August 2017, when DBRS confirmed the “A” ratings on all obligations outstanding under BMPS CB2 and removed the Under Review with Negative Implications 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: Alessandra Maggiora, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 3 September 2013

DBRS Ratings Limited
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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
-- DBRS Criteria: Guarantees and Other Forms of Support
-- Legal Criteria 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 and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European SMEs
-- Interest Rate Stresses for European Structured Finance Transactions Methodology
-- 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.