Press Release

DBRS Morningstar Upgrades Ratings on Banca Carige S.p.A. Covered Bonds (OBG - Mortgages - Programme 1) to BBB (high) and assigns rating to Series 646

Covered Bonds

October 28, 2021

DBRS Ratings GmbH (DBRS Morningstar) upgraded its ratings on the obbligazioni bancarie garantite (OBG; the Italian legislative covered bonds) issued under the EUR 5,000,000,000 Banca Carige S.p.A. Covered Bonds Programme (Carige OBG1 or the Programme) to BBB (high) from BBB.

Concurrently, DBRS Morningstar assigned a BBB (high) rating to Series 646 (ISIN IT0005461626) issued under the Programme, and discontinued its ratings on Series 521 (ISIN IT0004658420), Series 629 (ISIN IT0005139859), Series 634 (ISIN IT0005170300), and Series 640 (ISIN IT0005346504), which were repaid between November 2020 and October 2021.

The upgrade reflects the reduced maturity mismatch between assets and liabilities following the issuance of Series 646, which is a 7-year fixed-rate series, with a 12-month maturity extension, issued for EUR 750 million (63% of the total amount of OBG outstanding), as well as the increased level of overcollateralisation (OC) observed during the last year.

The ratings reflect the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of B (high), which is the Long-Term Critical Obligations Rating of Banca Carige S.p.A. (Carige). Carige is the Issuer and Reference Entity for the Programme. DBRS Morningstar classifies Italy as a jurisdiction in which covered bonds are a particularly important funding instrument and deems the CP strategic for the core activity of the Issuer.
-- 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 final 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 OC of 22%, as expressed in the investor report, and the 43.9% OC to which DBRS Morningstar gives credit, equal to the minimum level observed in the past 12 months, adjusted by a scaling factor of 0.93.

DBRS Morningstar analysed the transaction using its European Covered Bond Cash Flow tool. 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 CP.

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 ratings of the CBs would be downgraded if any of the following occurred: (1) the CPCA was downgraded below BBB (low); (2) the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects; (3) the relative amortisation profiles of the OBG and CP were to move adversely; (4) the LSF assessment associated with the Programme was downgraded; or (5) volatility in the financial markets caused the currently estimated market value spreads to increase.

BNP Paribas Securities Services SCA, Milan branch acts as the account bank for this transaction. Based on its private rating and 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 the “Legal Criteria for European Structured Finance Transactions” and “Rating and Monitoring Covered Bonds” methodologies.

Credit Suisse International is the swap counterparty: the swap documentation is not in line with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology. Therefore, no credit was given to swaps in DBRS Morningstar’s analysis.

The total outstanding amount of OBG is currently EUR 1.2 billion. As at 30 September 2021, the balance of the CP totalled EUR 2.7 billion of residential loans (97.5% of the total pool balance) and commercial loans (2.5%) plus EUR 90 million of cash, resulting in a total OC of 121.6%.

The CP comprised 41,490 mortgage loans originated by network banks that are part of the Banca Carige Group.

The weighted-average current loan-to-value ratio of the mortgages was 44.7% with an average seasoning of 8.1 years. The assets securing the loans in the CP were mainly distributed in the Italian regions of Liguria (39.9% of the loan balance), Tuscany (12.0%), and Lombardy (11.0%).

The CP comprised fixed-for-life loans (40.8% by outstanding balance) and floating-rate loans (59.2%). 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 fixed rate. The resulting interest rate risk is considered as unhedged 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 7.2 years, whereas the WAL of the OBG, as of today, was 6.7 years, taking into account the expected maturities. The resulting asset-liability maturity mismatch is mitigated by the 15-month maturity extension in case of an Issuer event of default and by the OC. Only Series 646 features a 12-month maturity extension.

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”, which is available on https://www.dbrsmorningstar.com/.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to increases in unemployment rates and income reductions for borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many cover pools. 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. For this transaction, DBRS Morningstar incorporated an increase in default probability of self-employed borrowers in its analysis of this programme. In addition, DBRS Morningstar assumed a moderate decline in residential property prices.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

ESG CONSIDERATIONS
DBRS Morningstar took into consideration some significant governance factors underlying the analysis for the RE’s 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” (10 June 2021).

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 limited to the final terms of Series 646.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 ratings, DBRS Morningstar was 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 20 November 2020, when DBRS Morningstar confirmed its BBB 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: https://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.

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

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 November 2015

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DBRS Ratings GmbH
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The rating methodologies used in the analysis of this transaction can be found at: https://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: https://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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