Morningstar DBRS Confirms Credit Ratings on Banca Monte dei Paschi di Siena S.p.A. Covered Bonds (OBG – Mortgages Programme 1) at AA and Assigns Credit Rating to Series 31

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) issued under the Banca Monte dei Paschi di Siena SpA (BMPS or the Issuer) EUR 20.0 billion covered bond programme (BMPS OBG1 or the Programme) guaranteed by MPS Covered Bond S.r.l. (the Guarantor) at AA.

The rating action follows the upgrade of the Issuer's ratings on 15 April 2024, and in particular its Long Term Critical Obligations Rating to BBB with a Positive trend from BBB (low) with a Stable trend, which led to an upgrade of the Covered Bonds Attachment Point (CBAP) for this Programme.

Concurrently, Morningstar DBRS assigned a credit rating of AA to Series 31 (ISIN IT0005593212): Series 31 is a EUR 750 million fixed-rate bond, which pays a 3.5% coupon and matures on 23 April 2029. The extended maturity date for this series is 23 April 2067.

Morningstar DBRS also discontinued its credit rating on Series 26 (ISIN IT0005359507), which was repaid on 29 January 2024.

As of the date of this press release, there were 12 outstanding series of OBG under the Programme, totalling a nominal amount of EUR 7.45 billion.

The credit ratings are based on the following analytical considerations:
-- A CBAP of BBB, which is BMPS' Long Term Critical Obligations Rating. BMPS is the Issuer and Reference Entity for the Programme. Morningstar DBRS classifies the Republic of Italy as a jurisdiction in which covered bonds (CBs) 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 "Very Strong" associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of A (low), which is the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- A LSF-L of A (high).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A level of overcollateralisation (OC) of 33.1% to which Morningstar
DBRS gives credit, which is the minimum level observed in the last 12 months adjusted by a scaling factor of 0.85. BMPS commits to a maximum asset percentage of 80.0%, corresponding to a level of committed OC of 25.0%.
-- The sovereign rating on the Republic of Italy, rated BBB (high) with a Stable trend by Morningstar DBRS, as of the date of this press release.

Morningstar DBRS analysed the transaction with its 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 Morningstar DBRS "Global Methodology for Rating and Monitoring Covered Bonds", Morningstar DBRS did not analyse any forced asset liquidations for this transaction, given the conditional pass-through structure. Morningstar DBRS assumed several prepayment scenarios, ranging between the observed prepayment rate and a 20% prepayment rate.

Everything else 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 CBs credit ratings.

In addition, Morningstar DBRS would downgrade the credit ratings if any of the following occurred: (1) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (2) the LSF Assessment associated with the Programme was downgraded; or (3) the CPCA was downgraded below A (low).

BMPS OBG1 features a conditional pass-through structure. If the guarantee is enforced, the Guarantor is not contractually bound to pursue a forced asset sale of the CP in a distressed market environment. Notwithstanding this, the Guarantor can still attempt to liquidate the assets with a view to meeting its payment obligations on the pass-through series and on the earliest maturing CBs. In so doing, the Guarantor shall attempt to maintain the Programme's OC proportionally to all asset sales. Additionally, the Programme documentation provides for the sale of the assets to take place only if the amortisation test (which sets the OC at a level of at least 75% of the OC resulting from the asset percentage used on the last test calculation date preceding the service of a guarantee enforcement notice) is complied with before and after the sale. If the amortisation test is breached, all series switch to pass-through payment on a pari passu and pro rata basis. Morningstar DBRS did not account for stresses on forced asset sales in its analysis because the Guarantor is not obliged to liquidate the assets.

The Bank of New York Mellon SA/NV - Milan Branch act as the account bank. Morningstar DBRS considers the risk arising from the exposure to this entity to be consistent with the credit ratings assigned to the OBG, pursuant to its "Legal Criteria for European Structured Finance Transactions".

Set-off risk is mitigated by the computation of such risk in the asset coverage tests.

In October 2023, the Programme's documentation was amended, in order to align the Programme with the new EU CB legislative framework. Morningstar DBRS has reviewed the relevant amendments and has considered them in its analysis.

As of March 2024, the total CP balance included EUR 12.0 billion of mortgages and EUR 207 million of principal receipts.

As of the date of this press release, there were EUR 7.45 billion worth of CBs outstanding under BMPS OBG1 for a total OC of 63.1%, net of set-off amount.

As of December 2023, the mortgage CP comprised 138,731 mortgages backed by residential properties located in Italy. All mortgages were originated by either BMPS or affiliated banks.

As of December 2023, the weighted-average (WA) unindexed current loan-to-value ratio of the mortgages was 48.0% with a WA seasoning of 8.4 years. The CP is well distributed across Italy with the highest concentrations in Tuscany (21.2% by outstanding loan balance), Lazio (15.4%), and Lombardy (14.2%).

The CP comprises fixed-rate loans (58.5% by outstanding balance), floating-rate loans (39.9%), and loans that have the option to switch to either a floating or fixed rate (1.6%). The floating-rate mortgages are indexed to different plain vanilla bases and reset at different dates.

As of the date of this press release, 59.7% of OBG notional pays a fixed-rate coupon until the expected maturity and, if the maturity is extended, the relevant series becomes a pass-through series paying, for most of the outstanding series, a floating rate plus a spread on a quarterly basis.

There are swap transactions in place to mitigate the interest rate risk; however, the swap documentation is not in line with Morningstar DBRS' "Derivative Criteria for European Structured Finance Transactions", and as a consequence Morningstar DBRS has not given credit to the swaps and has considered the interest rate mismatch in its analysis.

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

As of 31 December 2023, the WA life of the CP was 9.5 years, which is longer than the WA life of 1.9 years of the OBG (calculated as of the date of this press release) when accounting for the expected maturity. This risk is mitigated by the long extendable maturity date, which falls between 33 and 39 years after the expected maturity date.

Morningstar DBRS assessed the LSF related to BMPS OBG1 as "Very Strong" according to its credit rating methodology. For more information, please refer to the Morningstar DBRS commentary "Italian Covered Bonds Legal and Structuring Framework Review", available at dbrs.morningstar.com.

Morningstar DBRS's credit ratings on the outstanding CB series address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related interest payment amounts and the related principal amount.

Morningstar DBRS's long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on the Issuer are likely to have an impact on this credit rating.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is: Global Methodology for Rating and Monitoring Covered Bonds (2 April 2024), https://dbrs.morningstar.com/research/430636.

Other methodologies referenced in this transaction are listed at the end of this press release.

In Morningstar DBRS' opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, Morningstar DBRS focused on the cash flow analysis.

A review of the transaction legal documents was focused on the amendments in the Programme's documentation aimed at aligning it with the new EU CB legal framework (October 2023) and on the final terms of Series 31.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to "Appendix C: The Impact of Sovereign Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include loan-by-loan data as of 30 April 2023, static pool default data spanning from 2003 to 2022, prepayment data spanning from 2010 to 2023 and stratification tables provided by the Issuer until December 2023.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit ratings, Morningstar DBRS was supplied with third-party assessments. However, this did not impact the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 4 August 2023, when Morningstar DBRS confirmed its credit ratings on the CB series outstanding under the Programme at AA.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 3 June 2015

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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Global Methodology for Rating and Monitoring Covered Bonds (2 April 2024), https://dbrs.morningstar.com/research/430636

-- European RMBS Insight Methodology (25 March 2024) and European RMBS Insight Model version 6.0.2.1, https://dbrs.morningstar.com/research/430103

-- European RMBS Insight: Italian Addendum (2 October 2023), https://dbrs.morningstar.com/research/421317

-- Global Methodology for Rating Banks and Banking Organisations (15 April 2024), https://dbrs.morningstar.com/research/431155

-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730

-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754

-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602

-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572

-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024),
https://dbrs.morningstar.com/research/429054

-- Global Methodology for Rating Sovereign Governments (6 October 2023), https:// dbrs.morningstar.com/research/421590

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

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