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Fitch Maintains BMPS's 'BBB' OBG on Rating Watch Evolving
July 14, 2017 / 3:39 PM / 3 months ago

Fitch Maintains BMPS's 'BBB' OBG on Rating Watch Evolving

(The following statement was released by the rating agency) MILAN/LONDON, July 14 (Fitch) Fitch Ratings is maintaining Banca Monte dei Paschi di Siena SpA's (BMPS, B-/RWE/B/RWN) mortgage covered bonds (Obbligazioni Bancarie Garantite, OBG) - rated 'BBB' - on Rating Watch Evolving (RWE). The OBG are guaranteed by MPS Covered Bond S.r.l.. The OBG was first placed on RWE when BMPS's Long-Term Issuer Default Rating (IDR) of 'B-' was placed on the same watch (see "Fitch Places Banca Monte dei Paschi di Siena on Rating Watch Evolving" dated 4 August 2016 available at www.fitchratings.com). Fitch will resolve the RWE on the covered bonds upon the resolution of the watch on the bank's IDR, which may take longer than the typical six months. KEY RATING DRIVERS The RWE on BMPS's OBG rating is driven by the RWE on BMPS's IDR of 'B-'. The 'BBB-' rating reflects an unchanged IDR uplift of two notches, a payment continuity uplift (PCU) of six notches, the maximum recovery uplift allowed by Fitch criteria and the 83% contractual asset percentage (AP) that Fitch takes into account in its analysis. This level of AP provides more protection than the unchanged breakeven AP for the current 'BBB' rating of 95.0%. The greatest contributor to the breakeven AP remains a credit loss of 3.4% followed by a cash flow valuation of 2.1%. The asset disposal loss component remains close to zero (-0.9%); for conditional pass-through (CPT) programmes such as BMPS's, the asset disposal loss represents the level of OC needed to ensure timely payment of interest on the covered bonds without triggering a forced sale of the assets as well as the positive impact of negative carry deduction made by the issuer in the contractual asset coverage test. In this case, the asset disposal loss is more than compensated by the positive impact of the negative carry deduction. The unchanged IDR uplift of two notches reflects that the bank's Long-Term IDR is above the bank's 'c' Viability Rating and a low risk of under-collateralisation at the point of resolution. This is based on Fitch's assessment of the Italian legal framework, which includes the existence of an independent asset monitor, asset eligibility criteria and a contractual minimum level of over-collateralisation. The unchanged six-notch PCU, rather than the standard eight notches for CPT programmes, reflects Fitch's view that the cover pool-specific alternative management for BMPS represents a high risk of payment continuity due to some weaknesses identified in the programme's structure (i.e. selective events triggering the enforcement of the guarantee, the lengthier grace period for curing a breach of the asset coverage test). This results in a strong reliance on the issuer's ability to service payments due on the OBG and could pose risks to a timely enforcement of the cover pool as a source of payments. RATING SENSITIVITIES The resolution of the RWE on the 'BBB' rating of BMPS OBG will depend on the resolution of the RWE on the bank's Long-Term Issuer Default Rating (IDR), which may take longer than the typical six months. Fitch notes that the programme documentation defines, among others, proceedings resulting from the implementation of the Bank Recovery and Resolution Directive as one of the events that would trigger an issuer default notice, delivered by the representative of the bondholders, but not an enforcement of the guarantee. According to the programme documentation, upon delivery of an issuer default notice the issuer would not be allowed, among others, to issue further series or tranche of OBG under the programme and no further payments to the subordinated lender would be made, under certain circumstances. Payments due under the OBG will continue to be made by the issuer until a guarantee enforcement notice is delivered according to the documented provisions. Fitch's breakeven AP for a given OBG rating will be affected by, among other factors, the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore, the breakeven AP for a covered bonds rating cannot be assumed to remain stable over time. Contact: Primary Analyst Roberto Del Ragno Director +39 02 87 90 87 206 Fitch Italia S.P.A. Via Morigi 6 20123, Milan Secondary Analyst Sara De Novellis Analyst +39 02 87 90 87 295 Committee Chairperson Ilaria Farina Senior Director +39 02 87 90 87 242 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email: stefano.bravi@fitchratings.com; Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Criteria Addendum: Italy (pub. 06 Jul 2017) here Criteria for Country Risk in Global Structured Finance and Covered Bonds (pub. 26 Sep 2016) here EMEA RMBS Rating Criteria (pub. 29 Nov 2016) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel file (pub. 20 Jan 2017) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 Feb 2017) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Structured Finance Rating Criteria (pub. 03 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) here Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 17 Feb 2017) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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