Fitch Affirms 5 OBG Programmes Issued by Large Italian Banks
The Outlooks on the OBG reflect those on the Italian banks' Issuer Default Ratings (IDR). A full list of rating actions, breakeven (BE) asset percentage (AP) and overcollateralisation (OC) components is at the end of this rating action commentary.
KEY RATING DRIVERS
BMPS's and UC CPT programmes have CPT features that minimise the risk of refinancing the cover assets to bridge maturity mismatches between assets and liabilities. BP's, UBI CB 2 and UC SB are soft bullet, with a 12-month principal maturity extension. This is reflected in the Discontinuity Cap (D-Cap) of the individual programmes.
UC CPT and UBI CB 2 OBG are secured by mixed pools of assets, including residential and secured loans to small and medium enterprises (SME). The cover pools of the other three programmes comprise residential mortgage loans.
The asset disposal loss is typically the greatest contributor to the BE OC of soft bullet programmes. This represents the cost of bridging refinancing need between amortising assets and bullet liabilities and it is driven by the rating spread levels (RSL) assumptions and large maturity mismatches. In UC SB it absorbs 17.7% OC and it stems from the 415bp RSL that Fitch assumes at 'AA' and the weighted average (WA) life of the cover assets of 9.5 years versus 4.3 years for the OBG.
Fitch does not disclose the BE OC components for BP's and UBI CB 2 because they have a limited rating uplift. Also, BP's OBG can be rated at their rating floor, given by the IDR as adjusted by the IDR uplift, irrespective of the level or protection provided through OC.
The BE OC of the CPT programmes of UC and BMPS is driven by the credit loss component of 17.2% and 5.4%, respectively, which measures the creditworthiness of the cover assets. The asset disposal loss component in CPT programmes is 0%, as there is no forced sale of the assets.
UC SB is fully hedged on the assets and on the liabilities side; and the cash flow valuation contributes to a lower level of BE OC (-3%), as interest rate mismatches between assets and liabilities are mitigated. The cash flow valuation of 5.4% for BMPS and 7.7% for UC CPT is driven by open interest rate positions (16.7% for BMPS and 19.7% for UC CPT) in the decreasing interest rate scenario, which is the worst case for those programmes. In case of BMPS, Fitch assumed 66% of the fixed rate liabilities as floating rate since swaps are in place with eligible counterparties (Royal Bank of Scotland N.V. (The), BBB+/Stable/F2; UBS Limited, A/Positive/F1 and Societe Generale, A/Stable/F1).
BP and UBI delivered no data for the purpose of this annual review; Fitch has used publicly available information. Their OBG are rated with a limited uplift, due to the lack of data provision.
All the programmes are eligible for an IDR uplift reflecting covered bonds exemption from bail-in. UC and BMPS OBG's programmes benefit from an IDR uplift of 1 notch due to the issuers being systemically important in their domestic market so that Fitch considers that resolution by other means is more likely than liquidation. BP's programme benefits from an IDR uplift of 1 notch as the buffer provided by senior unsecured debt in excess of 5% makes a resolution scenario more likely than liquidation.
KEY RATING DRIVERS - BMPS OBG
The rating is based on BMPS's Long-term IDR of 'B-', an unchanged IDR uplift of 1 notch, an unchanged D-Cap of 3 notches (moderate high discontinuity risk) and the 77.5% AP that Fitch takes into account in its analysis, which provides more protection than the 90% 'BBB' BE AP (equivalent to an OC of 11%).
In its analysis, Fitch took into account the 77.5% AP the issuer publicly discloses in the investor report (December 2015). This level of AP allows a three-notch recovery uplift from the 'BB' tested rating on a probability of default (PD) basis.
The unchanged D-Cap of 3 notches is driven by the moderate high risk assessment 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 some structural features result in a strong reliance on the issuer's ability to service payments due on the OBG and could pose risks on a timely enforcement of the cover pool as a source of payments.
KEY RATING DRIVERS - BP OBG
The rating is based on BP's Long-term IDR of 'BB', an unchanged IDR uplift of 1 notch, an unchanged D-Cap of 2 notches (high discontinuity risk) and the 80.7% AP that Fitch takes into account in its analysis.
The 80.7% AP the issuer undertakes to maintain in its quarterly test performance report (November 2015) theoretically allows the OBG rating to exceed the 'BB+' rating floor. However, in Fitch's view, provisions that apply to BP as Italian account bank, combined with the magnitude of the exposure towards this counterparty (EUR1.6bn as of end-November 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.
The unchanged D-Cap of 2 notches is driven by the high assessment of the liquidity gap and systemic risk component.
KEY RATING DRIVERS - UBI CB 2
The rating is based on UBI's Long-term IDR of 'BBB', an unchanged IDR uplift and D-Cap of 0 notch (full discontinuity risk) and the 100% contractual AP that Fitch takes into account in its analysis.
The full discontinuity D-Cap assessment is driven by the liquidity gap and systemic risk components. Fitch considers the 12-month maturity extension not enough to timely sell a pool comprising SME loans (58% as of June 2015), which we view as less liquid than residential mortgage loans. The assessment also factors in a dynamic reserve, which covers one month of interest on the OBG on a rolling basis.
KEY RATING DRIVERS - UC SB
The 'AA' rating is based on UC's Long-term IDR of 'BBB+', an unchanged IDR uplift of 1, an unchanged D-Cap of 2 notches (high discontinuity risk) and the 72.1% AP that Fitch takes into account in its analysis, which provides more protection than the unchanged 80.5% 'AA' BE AP (equivalent to 24.2% BE OC).
In its analysis, Fitch relies on the highest AP of the last 12 months (72.1% June 2015). This is because the issuer's Short-term rating is 'F2' and the programme is not considered dormant or in wind down. The 72.1% AP allows a two-notch uplift for recoveries given default above the 'A+' tested rating on PD basis, which is commensurate with recoveries given default of at least 91%.
The unchanged D-Cap of 2 notches is due to the weak link assessment of liquidity gap and systemic risk component. In a scenario where the recourse of the covered bonds switches from the issuer to the cover pool, Fitch expects the 12-month maturity extension that is envisaged in the documentation to be sufficient to successfully refinance the cover pool in a stress scenario two notches above the IDR, as adjusted by the IDR uplift.
KEY RATING DRIVERS - UC CPT
The 'AA+' rating is based on UC's Long-term IDR of 'BBB+', an unchanged IDR uplift of 1, an unchanged D-Cap of 8 notches (minimal discontinuity risk) and the 80% AP that Fitch takes into account in its analysis, which provides more protection than the unchanged 81.5% 'AA+' BE AP (equivalent to 22.7% BE OC).
The issuer publicly undertakes in its investor report to apply an AP of 80% (October 2015), which allows a two-notch recovery uplift from the 'AA-' tested rating on PD basis.
The unchanged D-Cap of 8 notches reflects the minimal discontinuity assessment of the CPT amortisation profile of the covered bonds and the 38 years principal maturity extension, which in Fitch's view eliminate the need of refinancing, should the recourse switch to the cover pool.
RATING SENSITIVITIES - Banca Monte dei Paschi di Siena SpA (BMPS) OBG
The 'BBB' rating would be vulnerable to downgrade if any of the following occurs: (i) BMPS's Issuer Default Rating (IDR) is downgraded by one or more notches to 'CCC' or below; or (ii) the number of notches represented by the IDR uplift and the Discontinuity Cap (D-Cap) is reduced to 3; or (iii) the asset percentage (AP) that Fitch considers in its analysis increases above Fitch's 'BBB' breakeven level of 90%.
RATING SENSITIVITIES - Banco Popolare (BP) OBG
The 'BB+' rating of the covered bonds issued by 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 IDR would trigger a downgrade on the covered bonds.
RATING SENSITIVITIES - Unione di Banche Italiane S.p.A. (UBI) OBG
The 'BBB+' rating would be vulnerable to downgrade if UBI's IDR is downgraded by one or more notches to 'BBB-' or below.
RATING SENSITIVITIES - UniCredit (UC) Soft Bullet
The 'AA' rating would be vulnerable to downgrade if any of the following occurs: (i) UC's IDR is downgraded by one or more notches to 'BBB'; or (ii) the number of notches represented by the IDR uplift and D-Cap is reduced to 2; or (iii) the AP that Fitch relies upon goes above the 80.5% 'AA' breakeven AP.
In addition, if the AP that Fitch considers in its analysis goes to the contractual limit of 93% the OBG would likely be downgraded to 'A'.
RATING SENSITIVITIES -UC Conditional Pass-Through
The 'AA+' rating would be vulnerable to downgrade if any of the following occurs: (i) UC's IDR is downgraded to 'B+' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to 3 or below; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AA+' breakeven level of 81.5%.
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.
The rating actions are as follows:
BMPS OBG affirmed at 'BBB'; Outlook Stable with a BE AP of 90%
BE OC components: 5.4% cash flow valuation, 5.4% credit loss, 0% asset disposal loss
BP OBG affirmed at 'BB+; Outlook Stable
UBI OBG guaranteed by UBI Finance CB 2 S.r.l. (UBI CB 2) affirmed at 'BBB+'; Outlook Stable
UC OBG guaranteed by UniCredit BpC Mortgage S.r.l. (UC SB) affirmed at 'AA'; Outlook Stable with a BE AP of 80.5%
BE OC components: -3% cash flow valuation, 13% credit loss, 17.7% asset disposal loss
UC OBG guaranteed by UniCredit OBG S.r.l. (UC CPT) affirmed at 'AA+'; Outlook Stable with a BE AP of 81.5%
BE OC components: 7.7% cash flow valuation, 17.2% credit loss, 0% asset disposal loss