February 12, 2015 / 4:58 PM / 3 years ago

Fitch Affirms BMPS's OBG at 'A'; Outlook Negative

(The following statement was released by the rating agency) MILAN/LONDON, February 12 (Fitch) Fitch Ratings has affirmed Banca Monte dei Paschi di Siena SpA.'s (BMPS, BBB/Negative/F3, Viability Rating: ccc) EUR8.3bn mortgage covered bonds (Obbligazioni Bancarie Garantite, OBG) at 'A' with a Negative Outlook. The affirmation follows a full annual review of the programme. KEY RATING DRIVERS The OBG's 'A' rating is based on BMPS's Long-term Issuer Default Rating (IDR) of 'BBB', an unchanged Discontinuity Cap (D-Cap) of 1 (very high risk), an IDR uplift of '1' and the 77.5% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 80.5% 'A' breakeven (BE) AP. The Negative Outlook on the covered bonds' rating is driven by the Negative Outlook on BMPS's IDR. Fitch has revised upwards the BE AP for the 'A' rating to 80.5% (corresponding to a lower BE overcollateralisation (OC) of 24%) from 77.5% (29% OC). The improvement reflects the change of the asset disposal loss component to 11.3% from 18.5%, which is the greatest contributor to the BE AP. The decrease in OC is due to reduced asset and liability maturity mismatch. The weighted average (WA) life of the covered bonds is now 4.2 years compared with 9.0 years for the cover assets (previously 2.7 and 9.5 years, respectively). In 2014, two EUR2bn three-year series were refinanced with the issuance of a EUR1.5bn 10-year series. The cash flow valuation component, with OC of 8.5%, has increased slightly from 8.1% reflecting hedged interest rate positions and a longer WA life of the cover pool than the covered bonds, which leads to a higher net present value of the assets than the liabilities. Around 73% of fixed-rate covered bonds (77% of the aggregate outstanding balance of the OBG) are hedged via liability swaps provided by UBS Limited (A/Stable/F1), Societe Generale (A/Negative/F1), Credit Suisse International (A/Stable/F1) and Royal Bank of Scotland International (A/Negative/F1). The credit loss component of 8.5% is the result of a 'A' WA frequency of foreclosure of 27.2% and a WA recovery rate of 71.4%. Fitch's loss expectation considers, among others, a cover pool which comprises broker-originated loans (21.5%) and foreign borrowers (4.0%). Fitch believes these loans have greater potential to default than a standard Italian mortgage loan (i.e. prime residential mortgage loans granted to an Italian borrower by the bank branch network). For the 'A' rating, which considers both an uplift on a probability of default (PD) basis and for recoveries given default, the asset disposal loss component is in line with the rating scenario that is tested for timely payments (i.e. 'BBB+' tested rating on a PD basis), while the other BE OC components represent 'A' stresses. Combined with Fitch's testing for at least 91% recoveries rather than 100% to assign two notches credit for recoveries given default, this is why the sum of the BE OC drivers is higher than the 24% 'A' BE OC. The unchanged D-Cap of 1 is due to the weak link assessment of liquidity gap and systemic risk. In a scenario where the recourse of the covered bonds switches from the issuer to the cover pool, Fitch's view is that the 12-month contractual maturity extension on the covered bonds provides a limited mitigant to the risk of refinancing the cover pool to make timely payments on the covered bonds. Fitch's view on the use or resolution method other than liquidation contributes to the IDR uplift of 1 based on the systemic importance of the issuer. The IDR uplift also takes into account that Italy is not a covered bonds-intensive jurisdiction and there is no protection provided by BMPS's senior unsecured debt, which is below the level of 5% of total adjusted assets. Fitch will not factor the IDR uplift into BMPS's covered bond rating as the Outlook on the issuer's IDR is Negative due to a potential weakening of support, which could result in BMPS's IDR being downgraded to its Viability Rating. Fitch takes into account the 77.5% AP committed by the issuer, as reflected on the issuer's website in its calculation of the asset coverage test and included in the programme's investor report as of December 2014. RATING SENSITIVITIES The 'A' rating would be vulnerable to downgrade if any of the following occurs: (i) BMPS's Long-term IDR is downgraded by one or more notches to 'BBB-' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to zero; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'A' BE level of 80.5%. If the AP that Fitch considers in its analysis rises to the contractual limit of 83% and/or to the legal maximum of 100%, it would not be sufficient to allow for timely payment of the covered bonds following an issuer default. As a result, the covered bond rating would likely be downgraded to 'BBB+', because this level of AP would limit the covered bond rating to one notch above the IDR, because of the one-notch credit for recoveries. The Fitch BE AP for the covered bond rating will be affected, amongst others, by 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 BE AP to maintain the covered bond rating cannot be assumed to remain stable over time. More details on the cover pool and Fitch's analysis will be available in a credit update report, which will shortly be available at www.fitchratings.com. In the report 'Breaking Down Breakeven Overcollateralisation', dated 8 July 2014, Fitch details its approach for determining the BE OC components. Contact: Primary Analyst Diana Ilaria Leone, CFA Director +39 028790219 Fitch Italia S.P.A. Via Morigi 6 Ingresso via Privata Maria Teresa, 8 Secondary Analyst Roberto Del Ragno Analyst +39 02879087206 Committee Chairperson Carmen Munoz Senior Director +34 93 323 8408 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Covered Bonds Rating Criteria', dated 08 August 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds', dated 14 May 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', dated 14 May 2014, 'Covered Bond Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum' dated 4 February 2014, 'EMEA Residential Mortgage Loss Criteria', dated 28 May 2014, 'EMEA RMBS Master Rating Criteria', dated 28 May 2013, ' Criteria Addendum: Italy - Residential Mortgage Loss and Cash Flow Assumptions' dated 5 June 2014, and 'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' dated 23 January 2014 are available at www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here Covered Bonds Rating Criteria – Mortgage Liquidity and Refinancing Stress Addendum here EMEA Residential Mortgage Loss Criteria here EMEA RMBS Master Rating Criteria here Criteria Addendum: Italy - Residential Mortgage Loss and Cash Flow Assumptions here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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