Press Release

DBRS Morningstar Confirms BBB (high) Ratings of Banca Carige S.p.A. Covered Bonds (OBG - Mortgages - Programme 3)

Covered Bonds

May 21, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its BBB (high) ratings of the obbligazioni bancarie garantite (OBG; the Italian legislative covered bonds) issued under the EUR 3,000,000,000 Banca Carige S.p.A. Covered Bonds Programme (Carige OBG3 or the Programme). This rating action follows the completion of a full review of the Programme.

Concurrently, DBRS Morningstar discontinued its rating on Series 641 (ISIN IT0005347734), which was repaid on 27 May 2020.

As of today, there were two series of OBG, guaranteed by Carige Covered Bond S.r.l., totalling an outstanding nominal amount of EUR 485 million under the Programme.

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 (RE) to the cover pool (CP). Banca Carige is the Issuer and RE for the Programme. DBRS Morningstar classifies the Republic of Italy as a jurisdiction for which covered bonds (CBs) 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 BBB (low), which is the lowest CPCA in line with the assigned LSF-Implied Likelihood (LSF-L).
-- An LSF-L of BBB (low).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A committed minimum overcollateralisation (OC) of 20.5%, as expressed in the investor report, and the 36.5% OC to which DBRS Morningstar gives credit, equal to the minimum level observed in the last 12 months, adjusted by a scaling factor of 0.93.

The transaction was analysed using the DBRS Morningstar 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 Morningstar’s “Rating and Monitoring Covered Bonds” methodology, no forced asset liquidation has been considered for this transaction, given the conditional passthrough structure, and DBRS Morningstar 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 ratings.

In addition, all else unchanged, the CB ratings would be downgraded if any of the following were to occur: (1) the CPCA were downgraded below BBB (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 passthrough structure, and its maturity is automatically extended up to the relevant Extended Maturity Date.

The Series currently outstanding under the Programme have a maturity date extendable by 38 years.

BNP Paribas Securities Services SCA, Milan Branch acts as the Transaction Bank and Cash Reserve Account Bank. Based on DBRS Morningstar’s private ratings of such bank and on the replacement provisions included in the documentation, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with its “Legal Criteria for European Structured Finance Transactions” methodology.

The total outstanding amount of OBG is currently EUR 485 million, while the aggregate balance of the CP, as at 31 March 2021, was EUR 623 million of residential mortgages plus EUR 111 million of cash collections, resulting in a total OC of 46.1%. However, considering the statutory limit on integration assets, the resulting net OC amounts to 45.9%.

As at March 2021, the CP comprised 8,172 mortgage loans originated by Banca Carige and Banca del Monte di Lucca, which is part of the Carige Group. The weighted-average current loan-to-value of the mortgages was 50.2% with an average seasoning of 4.5 years. The assets securing the loans in the CP are located mainly in Liguria (33.8%), Lombardy (19.1%), and Tuscany (11.5%).

The CP comprised fixed-for-life loans (75.6% by outstanding balance) and floating-rate loans (24.3%). 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 Morningstar’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 about 7.6 years, whereas the WAL of the OBG is currently 1.2 years, taking into account the expected maturity. The resulting asset-liability maturity mismatch is mitigated by the 38-year maturity extension and by the OC.

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

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may increase in the coming months for many CPs, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. In the CP analysis of this programme, DBRS Morningstar assumed a moderate decline in residential property prices.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 28 January 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 24 April 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated CBs in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/359987/covid-19-the-impact-on-european-covered-bonds and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS
DBRS Morningstar took into consideration some significant governance factors underlying the analysis for the RE’s private rating, and considers them as significant also for the covered bonds’ ratings, in that they may affect the CBAP of this Programme.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is “Rating and Monitoring Covered Bonds” (27 April 2020).

DBRS Morningstar 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 at: http://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include historical performance data (static pool default and recovery data from 2006 to 2020; dynamic pool delinquency and prepayments data from 2005 to 2020); and loan-level and stratification information on the CP as at 31 March 2021 provided by the Issuer.

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

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

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

DBRS Morningstar 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 21 May 2020, when DBRS Morningstar confirmed its BBB (high) ratings on the series outstanding under the Programme.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is 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: 21 May 2019

DBRS Ratings GmbH, Sucursal en España
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Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
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60311 Frankfurt am Main
Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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