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 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) covered bond programme (BMPS OBG2 or the Programme) guaranteed by MPS Covered Bond 2 S.r.l. (the Guarantor) at AA (low).

This rating action follows the completion of a full review of the ratings.

Concurrently, Morningstar DBRS discontinued its credit ratings on Series 40 (IT0005433781), which was repaid on 29 July 2024.

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, which is the lowest in line with the assigned LSF-Implied Likelihood (LSF-L).
-- A LSF-L of `A'.
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A level of overcollateralisation (OC) of 31.6% 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 77.0%, corresponding to a level of committed OC of 29.9%.
-- 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 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. Morningstar DBRS did not account for stresses on forced asset sales in its analysis because the Guarantor is not obliged to liquidate the assets.

As of the date of this press release, there were 11 outstanding series of OBG under the Programme, totalling a nominal amount of EUR 7.55 billion. As of June 2024, the total CP balance included EUR 9.8 billion of mortgages and EUR 1.5 billion of principal receipts, which would result in a total estimated OC of 37.4%.

As of 31 March 2024 (the cut-off date), the CP comprised mortgages secured on residential properties (73.9% by total portfolio balance) as well as commercial properties (13.0%). The rest (13.1%) consists of substitute assets. The mortgage CP comprised 109,039 mortgage loans backed by properties located in Italy with a weighted-average (WA) current loan-to-value ratio of 51.0% for the residential pool and 27.2% for the commercial pool. The mortgage pool is well seasoned, with a WA seasoning of 7.6 years. Geographically, the pool is also well diversified across Italy, with the three largest concentrations in the regions of Tuscany (23.7%), Lombardy (16.3%), and Lazio (11.8%).

As of the cut-off date, the mortgage CP comprised fixed-rate loans (60.9% by outstanding balance) and floating-rate loans linked to different indexes and resets (39.1%), while 80.6% of OBG pays a floating-rate 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 CB are denominated in euros. As such, investors are not currently exposed to any foreign exchange risk.

The WA life of the assets is approximately 9.5 years while that of the CBs, as of the date of this press release, is 1.6 years when accounting for the expected maturity. This risk is mitigated by the long extendable maturity date, which falls on 31 December 2057.

Morningstar DBRS 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 commentary "Italian Covered Bonds Legal and Structuring Framework Review", available at https://dbrs.morningstar.com.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 factor(s) 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 (23 January 2024) https://dbrs.morningstar.com/research/427030 .

Morningstar DBRS analysed the transaction structure in Covered Bond Cash Flow Tool. considering the default rates at which the rated notes did not return all specified cash flows.

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 (02 April 2024) https://dbrs.morningstar.com/research/430636

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

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating action.

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/436000.

The sources of data and information used for these credit ratings include loan-by-loan data as of 31 May 2024, static pool default data spanning from 2003 to 2023, and stratification tables and payment reports provided by the Issuer until June 2024.

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 issuer took place on 23 April 2024 when Morningstar DBRS confirmed its AA (low) credit ratings on the CB series outstanding under the Programme.

The lead analyst responsibilities for this transaction have been transferred to Tomas Rodriguez-Vigil Junco.

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: Tomas Rodriguez-Vigil Junco, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: September 03, 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 (25 March 2024) and European RMBS Insight Model version 8.0.0.1, https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: Italian Addendum (28 June 2024),
https://dbrs.morningstar.com/research/435263
-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024), https://dbrs.morningstar.com/research/428544
-- Rating CLOs Backed by Loans to European SMEs (20 June 2024) and SME Diversity Model version 2.7.1.4, https://dbrs.morningstar.com/research/434775
-- Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881
-- Legal Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435165
-- Derivative Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435260
-- Interest Rate Stresses for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435278
-- 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 (15 July 2024),
https://dbrs.morningstar.com/research/436000
-- 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.