DBRS Confirms “A” Ratings on Unione di Banche Italiane S.p.A. Covered Bonds (OBG - Mortgages - Programme 2)

DBRS Ratings Limited (DBRS) confirmed its “A” ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Unione di Banche Italiane S.p.A. Covered Bonds Programme 2 (UBI OBG2 or the Programme). This rating action follows the completion of a full review of the Programme.

Concurrently, DBRS discontinued its rating of Series 1 (ISIN IT0004818701), which was redeemed on 28 May 2018.

As of today, there are five series of OBG, guaranteed by UBI Finance CB2 S.r.l., totalling an outstanding nominal amount of EUR 1.95 billion under the Programme.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (low), which is the Long-Term Critical Obligations Rating of Unione di Banche Italiane S.p.A. (UBI). UBI 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 (CP) strategic for the core activity of the Issuer.
-- A Legal and Structuring Framework (LSF) Assessment of “Average” associated with the Programme.
-- An LSF-Implied Likelihood (LSF-L) floored at A (low).
-- A one-notch uplift for good recovery prospects.
-- No committed overcollateralisation (OC). The minimum observed OC level during the past 12 months is 24.2%. However, DBRS gives credit to a limited level of OC equal to 2%, which is considered to be sustainable based on information from the Issuer and expected market developments.

The transaction was analysed with 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.

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 ratings of the covered bonds would be downgraded if the quality of the CP and the level of OC were no longer sufficient to support a one-notch uplift for good recovery prospects.

Following some amendments to the Programme’s documentation, executed in May 2018, UBI acts as the Account Bank, which also holds the Reserve Account. Based on the rating of UBI and on the Account Bank’s replacement provisions included in the documentation, DBRS considers the risk of such counterparty consistent with the ratings assigned, in accordance with its “Legal Criteria for European Structured Finance Transactions” methodology.

The total outstanding amount of OBG is EUR 1.95 billion while the aggregate balance of the CP, as at 31 August 2018, was EUR 2.8 billion of residential (45%) and commercial (55%) mortgages plus EUR 44 million of cash collections, resulting in a total OC of 45.1%.

As at August 2018, the CP comprised 26,158 mortgages originated by network banks of the UBI group. The weighted-average current loan-to-value ratio of the mortgages was 38.0% with a seasoning of 8.1 years. The CP was mainly distributed in Lombardy (46.7%), Piedmont (10.5%) and Lazio (6.9%).

The CP comprised fixed-for-life loans (11.5% by outstanding balance) and floating-rate loans (88.5%), indexed to different plain-vanilla bases and resetting at different dates. In comparison, 100% of the liabilities pay a floating rate indexed to three-month Euribor. The resulting interest and basis risks are unhedged: this has been considered 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 6.1 years, whereas the WAL of the OBG, as of today, is 2.6 years. The resulting asset-liability maturity mismatch is mitigated by the 12-month maturity extension in case of an Issuer event of default and by the uncommitted OC.

DBRS has assessed the LSF related to the UBI OBG2 as “Average”, 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 ratings 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.

A review of the transaction legal documents has been limited to the amendments to the Programme’s documentation, executed in May 2018. These amendments affected the following documents: (1) Programme Agreement, (2) Intercreditor Agreement, (3) Cover Pool Management Agreement, (4) English Account Bank Agreement, (5) Cash Allocation, Management and Payments Agreement, (6) Master Definitions Agreement. The other 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-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 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 21 December 2017, when DBRS assigned a rating of “A” to Series 6 and confirmed the ratings of the other CB Series outstanding under the Programme at “A”.

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: 27 October 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
-- 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 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.