Fitch Downgrades Banco Popolare's OBG to 'BB '; Outlook Stable
The rating action follows the programme's amendments on 25 September 2015, which relate to provisions applicable to the account bank and back-up servicer (BUS) appointment, the repayment of a subordinated loan, and a trigger for delivering certain solvency certificates.
Fitch originally placed the OBG on RWN upon BP's IDR downgrade to 'BB' from 'BBB' (see 'Fitch Takes Rating Actions on 9 Italian OBG Programmes' dated 22 May 2015 and 'Fitch Maintains BP's OBG on RWN on Proposed Amendments to Programme' dated 6 July 2015 at www.fitchratings.com).
KEY RATING DRIVERS
The 'BB+' rating is based on BP's Long-term Issuer Default Rating (IDR) of 'BB', an unchanged IDR uplift of 1, an unchanged Discontinuity Cap (D-Cap) of 2 (High risk) and the 80.7% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the 93% 'BB+' breakeven AP, which is also the maximum contractual AP. The Stable Outlook for the OBG mirrors the Stable Outlook on BP.
The 80.7% AP that the issuer undertakes in its quarterly test performance report theoretically allows the OBG to reach the 'BBB+' rating; however, in Fitch's view provisions that apply to BP as Italian account bank, combined with the magnitude of the exposure towards this counterparty (EUR1.2bn as of end-August 2015), prevent a recovery uplift above the 'BB+' covered bonds rating floor, represented by the 'BB' IDR as adjusted by the IDR uplift of 1.
As a consequence of the amendments, Fitch also revised the systemic alternative management component of the D-Cap, to 'High' from 'Moderate High'. Therefore, the unchanged D-Cap of 2 is now driven by what Fitch views as the weakest-link risk in liquidity gap and systemic risk and systemic alternative management.
The 'High' systemic alternative management risk assessment reflects the appointment of the BUS, which would now be triggered if BP's rating is downgraded below 'BB-' (vs. 'BBB-' previously) in its role as servicer. Fitch considers such provision weaker than peers, whereby the BUS appointment is triggered upon a downgrade of the issuer's rating to below 'BBB-'
The 'BB+' rating of the covered bonds issued by Banco Popolare (BP) would be upgraded if counterparty risk is mitigated and, among others, if the exposure to the internal account bank reduces.
A downgrade of BP's Issuer Default Rating would trigger a downgrade on the covered bonds.
The Fitch breakeven asset percentage (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.