Press Release

DBRS Morningstar Places Credit Ratings on Banca Carige S.p.A. Covered Bonds (OBG - Mortgages - Programme 1) Under Review With Negative Implications

Covered Bonds

November 17, 2023

DBRS Ratings GmbH (DBRS Morningstar) placed Under Review with Negative Implications (UR-Neg.) its AA credit 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 (the Programme). This credit rating action follows the completion of a full review of the Programme.

Concurrently, DBRS Morningstar discontinued its credit ratings on Series 602 (ISIN IT0004883622) and Series 647 (ISIN IT0005466252), which were repaid in January and July 2023, respectively.

The UR-Neg. designation reflects the interest rate increase that has occurred since the last review, which affects the projected liquidation value of the fixed-rate portion of the cover pool (CP) following the assumed default of the reference entity (RE), as well as a change in the CP composition, which is now more significantly represented by fixed-rate loans: 80.8% of the total CP compared with 58.8% as of the previous cut-off date.

DBRS Morningstar’s review will assess a possible evolution in the composition of the CP, as well as the impact of the amendment to the Programme documentation, which is expected to be executed at the beginning of 2024 in order to align the Programme with the new CB legislative framework.

As of the date of this press release, there were 12 series of OBG outstanding under the Programme, totalling an outstanding nominal amount of EUR 1.9 billion. The series are all guaranteed by Carige Covered Bond S.r.l. (the Guarantor).

The credit ratings reflect the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (low), which is the Long Term Critical Obligations Rating of BPER Banca S.p.A. (BPER). BPER is the Issuer and 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 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, which is the lowest CPCA in line with the final LSF-Implied Likelihood (LSF-L).
-- An LSF-L of A (high).
-- A two-notch uplift on the LSF-L for high recovery prospects.
-- A level of overcollateralisation (OC) of 34%, to which DBRS Morningstar gives credit, which is the level committed by the Issuer.
-- 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, 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 two-notch downgrade of the LSF-L, resulting in a two-notch downgrade of the CB credit ratings.

In addition, all else remaining equal, the credit ratings on the CBs would be downgraded if any of the following occurred: (1) the CPCA was downgraded below BBB; (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 the CP were to move adversely; (4) the LSF assessment associated with the Programme was downgraded; (5) volatility in the financial markets caused the currently estimated market value spreads to increase, or (6) the sovereign rating on the Republic of Italy was downgraded below BBB (high).

BNP Paribas, Italian branch acts as the account bank for this transaction. Based on DBRS Morningstar’s private rating on the account bank and the replacement provisions included in the transaction documentation, DBRS Morningstar considers the risk associated with such counterparty to be consistent with the credit ratings assigned, in accordance with its “Legal Criteria for European Structured Finance Transactions” methodology and “Global Methodology for Rating and Monitoring Covered Bonds”.

The total outstanding amount of OBG under the programme is currently EUR 1.9 billion. As at 30 September 2023, the balance of the CP totalled EUR 3.0 billion of residential loans (96.6% of the total pool balance) and commercial loans (3.4%) plus EUR 215 million of cash, resulting in a total OC of 59.6%.

The CP comprised 33,519 mortgage loans originated by a network of banks that were part of the Banca Carige Group.

As of 30 September 2023, the weighted-average current loan-to-value ratio of the mortgages was 53.5% with an average seasoning of 4.2 years. The assets securing the loans in the CP were mainly distributed in the Italian regions of Liguria (21.8% of the loan balance), Lombardy (19.4%), and Emilia-Romagna (10.4%).

The CP comprised fixed-for-life loans (80.8% by outstanding balance) and floating-rate loans (19.2%). 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 has been considered 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 9.7 years whereas the WAL of the OBG, as of the date of this press release, was 4.2 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 and Series 653 feature 12-month maturity extensions.

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”, which is available on https://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
Credit rating actions on the Issuer are likely to have an impact on these credit ratings.

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” 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.

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

DBRS Morningstar is undertaking a review and will remove the credit rating from this status as soon as it is appropriate.

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 DBRS Morningstar Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://www.dbrsmorningstar.com/research/421590.

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.

The sources of data and information used for these credit ratings include historical performance data (static pool default data for the residential pool from 2018 to 2022; dynamic pool recovery data for loans defaulted between 1995 and 2022; and dynamic pool prepayments data from 2015 to 2023) as well as loan-level and stratification information on the CP as at 30 September 2023 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 ratings, 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 18 November 2022, when DBRS Morningstar confirmed its AA ratings on the CB Series outstanding under the Programme.

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

These credit ratings are Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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: Gareth Levington, Managing Director
Initial Rating Date: 23 November 2015

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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.

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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