OREANDA-NEWS. Fitch Ratings has placed Banca Monte dei Paschi di Siena SpA's (BMPS, B-/RWE/B/RWN, ccc/RWE) 'BBB' mortgage covered bonds (Obbligazioni Bancarie Garantite, OBG) on Rating Watch Evolving (RWE).

The rating action follows the RWE that Fitch has placed on BMPS's Long-Term Issuer Default Rating (IDR) on 4 August 2016 (see "Fitch Places Banca Monte dei Paschi di Siena on Rating Watch Evolving" available on www. fitchratings. com). Fitch will resolve the RWE on BMPS's covered bonds following the resolution of the RWE on the bank's IDR.

KEY RATING DRIVERS

The RWE on BMPS's outstanding OBG directly reflects that on the bank's IDR. The current rating of the covered bonds has no cushion against a downgrade of the IDR: all else being equal, any upside or downside movement of the issuer's IDR will be reflected in the covered bonds rating.

The rating is based on BMPS's Long-Term IDR of 'B-', an unchanged IDR uplift of 1 notch, an unchanged Discontinuity Cap (D-Cap) of 3 notches (moderate high risk) and the 83% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 90% 'BBB' breakeven AP (corresponding to a breakeven overcollateralisation (OC) of 11.1%).

The 83% AP publicly undertaken by BMPS in its payment report (as of June 2016) is adequate to support timely payments in a 'BB' tested rating on a probability of default (PD) basis and allows the covered bonds to reach a three-notch recovery uplift in a 'BBB' rating scenario where the covered bonds are assumed at default.

The 90% 'BBB' breakeven AP is driven by credit loss and cash flow valuation, both at 5.4% in a 'BBB' scenario. The 5.4% credit loss results from a 'BBB' weighted average (WA) foreclosure frequency of 22.1% and a WA recovery rate of 76.7%.

The 5.4% cash flow valuation is driven by the open interest rate positions between floating-rate assets and floating-rate liabilities of around 24% in a decreasing interest rate scenario (which is most stressful). Sixty-six per cent of the fixed-rate liabilities are hedged with external eligible counterparties and therefore the agency considered post-swap cash flows for the hedged liabilities. The asset disposal loss for this programme is 0% as the programme has a conditional pass-through structure (CPT) and no forced sale of the assets would be needed.

The unchanged D-Cap of 3 notches is driven by what Fitch assesses as moderate high risk of the systemic alternative management component. Despite the OBG's CPT amortisation profile, the agency continues to apply its "weak link" approach among the components of the D-Cap; Fitch believes that the removal of certain guarantee enforcement events and a longer five-month test grace period result in a strong reliance on the issuer's ability to service payments due on the OBG and could pose risks to the timely enforcement of the cover pool as a source of payments.

The unchanged IDR uplift of 1 notch reflects the bail-in exemption for fully collateralised covered bonds and that BMPS is a large institution so that resolution by other means than liquidation is likely.

RATING SENSITIVITIES

The 'BBB' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by 1 or more notches to 'CCC' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to 3 or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'BBB' breakeven level of 90%.

All else being equal, the 'BBB' rating would likely be upgraded if the bank's IDR is upgraded by 1 or more notches to 'B' or above, provided that adequate protection is in place to support the OBG rating above the 'BBB' rating scenario.

The Fitch breakeven AP for the covered bond rating will be affected, among 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 breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.