DBRS Morningstar Discontinues Ratings on Banco BPM Covered Bonds (OBG - Mortgages - Popolare Programme 1)

DBRS Ratings GmbH (DBRS Morningstar) discontinued and withdrew the credit ratings on the two series of Obbligazioni Bancarie Garantite (OBG; the Italian legislative covered bonds) outstanding under the Banco BPM Covered Bonds Programme 1 (Banco BPM OBG1 or the Programme). The decision to discontinue and withdraw the credit ratings was made at the request of the Issuer. Prior to the discontinuation, DBRS Morningstar confirmed its A (high) credit ratings on the outstanding Series 7 IT0004982291 and Series 12 IT0005329583.

Concurrently, DBRS Morningstar discontinued its credit rating on Series 6 IT0004908544, which was repaid on 31 March 2023. DBRS Morningstar also discontinued and withdrew its credit rating on the Registered CB IT0004681158, which has been guaranteed since April 2023 by another guarantor (BPM Covered Bond 2 S.r.l.), under a different covered bond (CB) programme, following a written resolution approved by the relevant bondholders on 5 April 2023.

As of today, the two series of OBG outstanding under the Programme total a nominal amount of EUR 2.0 billion. The series are guaranteed by BP Covered Bond S.r.l.

The credit ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (low), which is the Long-Term Critical Obligations Rating (COR) of Banco BPM SpA (Banco BPM). Banco BPM is the Issuer and Reference Entity (RE) for the Programme. DBRS Morningstar classifies Italy as a jurisdiction in which CBs are a particularly important funding instrument and deems the cover pool (CP) strategic for the Issuer’s core activity;
-- A Legal and Structuring Framework (LSF) Assessment of “Adequate” associated with the Programme;
-- A Cover Pool Credit Assessment (CPCA) of BB, which is the lowest in line with the assigned LSF-Implied Likelihood (LSF-L);
-- An LSF-L of A (low);
-- A two-notch uplift for high recovery prospects;
-- A level of overcollateralisation (OC) of 30.0% to which DBRS Morningstar gives credit, being the minimum OC level observed during the past 12 months, adjusted by a scaling factor of 0.9. DBRS Morningstar gives limited credit to the cash portion of the CP; and
-- The sovereign rating on the Republic of Italy, rated BBB (high) with a Stable trend by DBRS Morningstar, as of the date of this press release.

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, and interest rate stresses.

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, all else unchanged, the CB credit ratings would be downgraded if the quality of the CP and the level of OC were no longer sufficient to support a two-notch uplift for high recovery prospects.

Banco BPM acts as the account bank for this transaction. The replacement trigger on Banco BPM in its capacity as the account bank is not fully compliant with DBRS Morningstar’s counterparty criteria; hence, DBRS Morningstar gives limited credit to the cash accumulating in the account bank in accordance with its “Global Methodology for Rating and Monitoring Covered Bonds”.

In March 2023, the Programme’s documentation was amended, with the postponement of Series 7 IT0004982291’s expected maturity to March 2024 from March 2023, and of the extended maturity to March 2025 from March 2024.

The total outstanding amount of OBG under the Programme is EUR 2.0 billion. As of 31 May 2023, the aggregate balance of the CP was EUR 2.8 billion of residential mortgages plus EUR 164 million of cash collections, resulting in a total OC of 46.2%. However, when considering the reduced credit DBRS Morningstar gives to cash, the resulting net OC amounts to 41.3%.

As of 31 May 2023, the CP comprised 44,009 loans secured by first-rank mortgages originated by Banco Popolare SC group, which merged with Banca Popolare di Milano in January 2017, giving rise to Banco BPM.

The weighted-average current loan-to-value ratio of the mortgages was 44.6% with a seasoning of 11.8 years. The CP was mainly distributed in Lombardy (28.9%), Veneto (12.6%), Tuscany (11.6%), and Emilia-Romagna (10.5%).

The CP comprised 28.8% fixed-for-life loans by outstanding balance and 71.2% floating-rate loans. The floating-rate mortgage loans are indexed to different plain-vanilla indexes and reset at different dates.

By comparison, all outstanding liabilities pay a floating rate linked to one- and three-month Euribor. The resulting interest and basis risks are not hedged. DBRS Morningstar has taken this into account in its 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 7.5 years, whereas the WAL of the OBG is 1.3 years. The resulting asset-liability maturity mismatch is mitigated by the 12-month maturity extension in case of an Issuer event of default and by the OC.

DBRS Morningstar 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” at www.dbrsmorningstar.com.

DBRS Morningstar’s 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.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar 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, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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 (4 July 2023) at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 (8 May 2023), https://www.dbrsmorningstar.com/research/413651/global-methodology-for-rating-and-monitoring-covered-bonds.

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

In DBRS Morningstar's opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS Morningstar focused on the cash flow analysis.

A review of the transaction legal documents was focused on the amendment agreements relating to the postponement of Series 7’s maturity and to the removal of the DBRS Morningstar rating from the final terms of the series outstanding under the Programme.

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 DBRS Morningstar Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://www.dbrsmorningstar.com/research/401817.

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 credit ratings include historical performance data (static pool default data from 2013 to 2022 for the residential pool; static pool delinquency data from 2014 to 2022; and dynamic pool prepayments data from 2013 to 2022), stratification information on the CP as at 31 May 2023, and loan-level information on the CP as at 31 December 2022 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 credit rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the credit rating analysis.

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

DBRS Morningstar 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 10 February 2023, when DBRS Morningstar confirmed its A (high) ratings on the series outstanding under the Programme.

Information regarding DBRS Morningstar credit 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://registers.esma.europa.eu/cerep-publication/. For further information on DBRS Morningstar 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: 15 February 2016

DBRS Ratings GmbH, Sucursal en España
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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Global Methodology for Rating and Monitoring Covered Bonds (8 May 2023), https://www.dbrsmorningstar.com/research/413651/global-methodology-for-rating-and-monitoring-covered-bonds.

-- Global Methodology for Rating and Monitoring Covered Bonds Addendum: Market Value Spreads (8 May 2023), https://www.dbrsmorningstar.com/research/413652/global-methodology-for-rating-and-monitoring-covered-bonds-addendum-market-value-spreads.

-- European RMBS Insight Methodology (27 March 2023), and European RMBS Insight model v 6.0.0.0, https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.

-- European RMBS Insight: Italian Addendum (29 September 2022), https://www.dbrsmorningstar.com/research/403237/european-rmbs-insight:-italian-addendum.

-- Global Methodology for Rating Banks and Banking Organisations (22 June 2023), https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations.

-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.

-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.

-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.

-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.

-- Global Methodology for Rating Sovereign Governments (29 August 2022), https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments.

-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.