DBRS Downgrades Banca Carige S.p.A. Covered Bonds (OBG - Mortgages - Programme 1) to BBB

DBRS Ratings Limited (DBRS) has today downgraded to BBB from BBB (high) the ratings of the Obbligazioni Bancarie Garantite (OBG, i.e. the Italian legislative Covered Bonds) rated by DBRS which are outstanding under the EUR 5,000,000,000 Banca Carige S.p.A. Covered Bonds Programme (Carige OBG1, or the Programme) guaranteed by Carige Covered Bond S.r.l. Concurrently, DBRS has removed the Under Review with Negative Implications (UR-Neg.) status.

There are currently 20 series of Carige OBG1 with a nominal amount of EUR 3.09 billion outstanding under the Programme. Out of those, DBRS currently rates six series, with an aggregate notional amount of EUR 2.78 billion.

This rating action follows the downgrade to BBB (high) from A (low) of the Republic of Italy’s rating that occurred on 13 January 2017.

The ratings reflect 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 to the Cover Pool (CP). Carige is the Issuer and the Reference Entity for the Programme. There is no Critical Obligations Rating associated with the Reference Entity, nor does DBRS currently classify Italy as a jurisdiction for which covered bonds 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 BB, being the lowest CPCA in line with the final LSF-Implied Likelihood.
-- An LSF-Implied Likelihood (LSF-L) of BB (high).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 22%, as expressed in the investor report, and the 28% OC to which DBRS gives credit, being the minimum observed in the last 12 months, adjusted by a scaling factor of 0.93.

The transaction was modelled using the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets, interest rate stresses and market value spreads to calculate liquidation values on the cover pool (CP).

Everything else being equal, a downgrade of the CBAP by three notches would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the covered bonds rating by one notch.

In addition, the ratings of the Programme would be downgraded if any of the following occurs: (1) the quality and consistency of the cover pool were no longer sufficient to support a two-notch uplift for high recovery prospects, (2) the LSF Assessment associated with the Programme were downgraded to Modest, (3) the relative amortisation profile of the OBG and CP were to move adversely or (4) volatility in the financial markets were to cause the currently estimated market value spreads to increase.

Deutsche Bank AG, London Branch, acts as the Transaction Account Bank. The DBRS private ratings of Deutsche Bank AG, London Branch comply with the threshold for the Account Bank given the rating assigned to the OBG, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” and “Rating European Covered Bonds” methodologies.

Credit Suisse International is both the Cover Pool Swap Counterparty and the Covered Bonds Swap Counterparty. However, the swap documentation does not incorporate DBRS rating triggers. As such, no credit was given to swaps in DBRS’s analysis.

The total outstanding amount of OBG is currently EUR 3.1 billion, while the aggregate balance of loans (as of November 2016) in the CP is EUR 4.3 billion of residential (94%) and commercial (6%) mortgages plus EUR 90 million of cash, resulting in a total OC of 37.6%.

As of November 2016, the CP comprised 57,644 mortgage loans originated by network banks that are part of the Carige group.

The weighted-average current loan-to-value of the mortgages was 46.7% with an average seasoning of seven years. The assets securing the loans in the CP were located predominantly in Liguria (40.6%), Tuscany (12.0%) and Lombardy (10.9%).

The CP comprised 78% floating-rate mortgage loans, indexed to different plain vanilla bases and that reset at different dates. This compares to 43.2% of the liabilities paying a floating rate linked to Euribor plus a spread. The resulting interest and basis risks are hedged by a swap with Credit Suisse International; however, the swap documentation does not incorporate DBRS rating triggers. Therefore, no credit was given to swaps in DBRS’s analysis: this has been considered in DBRS’s cash flow modelling.

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 of the cover pool is eight years, based on a 0% prepayment rate, which is longer than the 5.1 years weighted-average life on the OBG, taking into account the expected maturities. This maturity-mismatch risk is partially mitigated by the 15-month maturity extension in case of an Issuer event of default, and by overcollateralisation.

DBRS has assessed the LSF related to the Carige OBG1 as Adequate, according to its rating methodology. For more information, please refer to the DBRS commentary, “Italian Obbligazioni Bancarie Garantite Legal and Structuring Framework,” at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating European Covered Bonds”.

In DBRS’s opinion, the change under consideration does not require the application of the entire principal methodology. Therefore, DBRS focused on an asset and cash flow analysis.

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 DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of data and information used for this rating include historical default performance data, loan-by-loan level information and stratification tables on the cover pool provided by the Issuer.

DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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 this rating 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 28 November 2016, when DBRS assigned a rating of BBB (high) to Series 636, and placed it UR-Neg.

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 regulations only.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 November 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 Range (Midpoints)
-- Global Methodology for Rating Banks and Banking Organisations
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria 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 and CDOs of Large Corporate Credit
-- Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
-- Unified Interest Rate Model Methodology for European Securitisations
-- The Effect of Sovereign Risk on Securitisations in the Euro Area
-- Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings

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.