Morningstar DBRS Confirms Credit Ratings on Banca Monte dei Paschi di Siena S.p.A. Covered Bonds (OBG – Mortgages – Programme 2) at AA (low)

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AA (low) 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 OBG2 or the Programme) guaranteed by MPS Covered Bond 2 S.r.l.

This credit rating action follows the postponement of the expected maturity of Series 39 (ISIN IT0005421794) from 29 April 2024 to 29 July 2027, per the amended final terms executed on 4 April 2024, as well as the upgrade of the Issuer's ratings on 15 April 2024, and in particular its Long Term Critical Obligations Rating to BBB Pos from BBB (low) Stb, which led to an upgrade of the Covered Bonds Attachment Point (CBAP) for this Programme

As of the date of this press release, there were 12 series of OBG outstanding under the Programme for a total nominal amount of EUR 8.3 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 BBB, being the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of "A".
-- A two-notch uplift for high recovery prospects.
-- A level of overcollateralisation (OC) of 27.6% to which Morningstar DBRS gives credit. BMPS commits to a maximum asset percentage of 77.0%, corresponding to a level of committed OC of 29.9%.
-- The sovereign rating of 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 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 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 CBs credit ratings.

In addition, the credit ratings of the Programme would be downgraded if any of the following were to occur: (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 BBB.

Following an Issuer default, the maturities of all OBG are extended to the Long Due for Payment Date (falling on 31 December 2057) 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 this mechanism, money is accumulated into an account opened by the guarantor with an eligible institution and paid out on the expected maturity date of each OBG. This implies a negative carry and has been taken into account in Morningstar DBRS' cash flow analysis.

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

As of March 2024, the total CP balance included EUR 9.8 billion of mortgages and EUR 1.5 billion of principal receipts. As of today, there were EUR 8.3 billion worth of CBs outstanding under BMPS OBG2, which results in a total OC of 37.3%.

As of December 2023, the mortgage CP comprised mortgages secured on residential properties (84.6% by outstanding loan balance) as well as commercial properties (15.4%). The CP comprises 111,184 mortgages with a weighted-average (WA) current loan-to-value ratio of 51.4% for the residential pool and 27.8% for the commercial pool, based on unindexed property values. The pool is well seasoned, with a WA seasoning of 7.4 years. Geographically, the pool is also well diversified across Italy, with the three largest concentrations in the regions of Tuscany (23.8%), Lombardy (16.2%), and Lazio (11.8%).

The reference rates of the underlying loans were floating-rate (37.0%), fixed-rate (59.3%), and optional (3.7%), while 80.6% of the OBG outstanding pays a floating coupon. As there are no hedging agreements in place, OBG holders are exposed to interest rate mismatch, which has been taken into account in Morningstar DBRS' cash flow analysis.

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

As of December 2023, the WA life of the CP was 9.6 years, which is longer than the 1.8-year WA life on the OBG (calculated as of the date of this press release) when taking into account the expected maturity. This risk is mitigated by the extension to the Long Due for Payment Date.

Morningstar DBRS has assessed the LSF related to BMPS OBG2 as "Very Strong", according to its credit rating methodology. For more information, please refer to the Morningstar DBRS commentaries "DBRS Assigns LSF Assessment to Italian Covered Bonds" and "Italian Obbligazioni Bancarie Garantite: Legal and Structuring Framework Review", available at https://dbrs.morningstar.com.

Morningstar DBRS' 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' 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 AND 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 amendment agreements for the postponement of Series 39's expected maturity, executed on 4 April 2024.

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 2012 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 rating, Morningstar DBRS was not supplied with third-party assessments. However, this did not affect 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 30 January 2024, when Morningstar DBRS confirmed its AA (low) credit ratings to the CB series outstanding under the Programme.

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 September 2013

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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 (27 March 2023) and European RMBS Insight Model version 7.0.0.0, https://dbrs.morningstar.com/research/411634

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

-- Global Methodology for Rating CLOs and Corporate CDOs (22 October 2023), https://dbrs.morningstar.com/research/422269

-- Rating CLOs Backed by Loans to European SMEs (22 October 2023) and SME Diversity Model version 2.6.1.4, https://dbrs.morningstar.com/research/422274

-- Global Methodology for Rating Banks and Banking Organisations (22 June 2023), https://dbrs.morningstar.com/research/415978

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

-- 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 (15 September 2023), https://dbrs.morningstar.com/research/420573

-- 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.