DBRS Confirms A (low) Rating of Banca Carige S.p.A. Covered Bonds (OBG - Mortgages - Programme 2)

DBRS Ratings Limited (DBRS) confirmed its A (low) rating of 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). This rating action follows the completion of a full review of the Programme.

As of today, there is one series of OBG, guaranteed by Carige Covered Bond 2 S.r.l., totalling an outstanding nominal amount of EUR 350 million under the Programme.

The rating reflects 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 covered bonds (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 67.9% 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 DBRS’s “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, while the aggregate balance of the CP, as at 30 September 2018, was EUR 636.8 million of commercial (88.4%) and residential (10.6%) mortgages plus EUR 46 million of cash collections, resulting in a total OC of 82.1%.

As at September 2018, the CP comprised 3,148 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 34.8% with an average seasoning of 7.0 years. The assets securing the loans in the CP are located mainly in Liguria (43.0%), Tuscany (16.0%) and Emilia-Romagna (7.4%).

The CP comprised fixed-for-life loans (18.9% by outstanding balance) and floating-rate loans (81.1%). 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. 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 5.3 years, whereas the WAL of the OBG is 2.3 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.

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” on www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable 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 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-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 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 10 May 2018, when DBRS upgraded to A (low) from BBB (high) its rating on the Series 635, outstanding under 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 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
-- 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.