Rating Action Commentary
ֳ Affirms Credem's and Desio's OBG Programmes at 'AA'
Tue 05 Nov, 2024 - 11:53 AM ET
ֳ - Milan - 05 Nov 2024: ֳ has affirmed Banco di Desio e della Brianza S.p.A.'s (Desio, BB+/Stable/B) and by Credito Emiliano S.p.A.'s (Credem; BBB/Positive/F3) Italian mortgage covered bonds (Obbligazioni Bancarie Garantite, OBG) at 'AA'. The Outlook on Desio's OBG is Positive and on Credem's programme is Stable.
The rating actions follow a periodic review of the OBG programmes and factor in updated assumptions for residential mortgage loans (see European RMBS Rating Criteria, published on 30 October 2024).
The covered bonds' ratings are based on the banks' Long-Term Issuer Default Ratings (IDR) and the various uplifts that are applied above the IDRs. They also consider the over-collateralisation (OC) protection provided through the programmes' asset percentages (AP).
KEY RATING DRIVERS
Programmes at Maximum Achievable Rating: The programmes are rated at their maximum achievable rating. The rating of Desio's OBG is constrained by the 'AA' country cap that applies to Italian covered bonds and structured finance; its Positive Outlook mirrors that on Italy's IDR and takes into account the buffer against an issuer's downgrade.
The rating of Credem's OBG is limited by the documented counterparty provisions on the account bank that support a maximum timely payment rating level of 'A+' for the covered bonds, constraining the programme's rating at 'AA'.
Relied-Upon AP: The AP that ֳ relies on in its analysis (80.0% for Desio and 61.3% for Credem, including cash) provides more protection than the respective 'AA' break-even (BE) AP, which is 80.5% (from 80.0%) and at 85.5% (unchanged) for Desio's and Credem's OBG, respectively. ֳ considers in its analysis the levels of AP that Desio publicly disclosed in the latest investor report and the highest nominal AP of the last 12 months for Credem.
ALM Loss Drives BE AP: The covered bonds have soft-bullet amortisation profiles and the BE AP for their ratings is driven by the loss arising from assets and liabilities mismatches (ALM loss), which is 21.6% and 14.5% for Desio and Credem, respectively. This is followed by a credit loss of 3.0% and 2.5%, respectively. While these components are broadly unchanged for Credem, the issuance of a new series and the reduced maturities mismatches contributed to Desio's smaller ALM loss component, versus 23.4% previously.
The 'AA' BE AP for Desio has been adjusted to factor in the additional OC that the issuer puts aside in the programme tests to account for set-off exposures, while Credem is not provisioning for set-off risk. ֳ believes that the set-off risk is a secondary risk driver and remedial actions (including sizing of the loss via deductions in the programme tests) will be triggered by the loss of 'BB-' deposit rating, while Desio has a 'BBB-' deposit rating.
Forward-Looking Assumptions: In its analysis, ֳ has applied a forward-looking approach to consider its expectations on assets and liabilities compositions, as per our projections on cover pool replenishment and new OBG issuance. We have considered the increasing trend in coupons for fixed- rate mortgages and the prevailing market conditions in the modelling of an additional OBG series.
Unchanged Uplifts: The 'AA' ratings of the covered bonds are eight (Desio) and six notches (Credem) above the respective banks' Long-Term IDRs. The maximum achievable uplift is 10 notches, consisting of a resolution uplift of two notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of two notches.
Resolution Uplift: The resolution uplift of two notches reflects the exemption from bail-in of fully collateralised OBG, the low risk of under-collateralisation at the point of resolution and our view that a bank resolution will not result in enforcement against the cover pool. The resolution uplift also considers that the banks' Long-Term IDRs are driven by their Viability Ratings.
PCU: The PCU of six notches reflects the OBG's 12-months protection for principal payments and the available protection for interest payments of at least three months.
Recovery Uplift: The recovery uplift of two notches takes into account that there are no limitations to recovery expectations and that the timely payment rating level is investment-grade.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The rating of Desio's OBG is sensitive to negative changes to Italy's Long-Term IDR and Outlook. A revision of the Outlook on Italy's IDR to Stable would trigger a similar action on Desio's OBG rating.
Further, the OBG ratings would be downgraded if the respective banks' Long-Term IDRs are downgraded to 'B+' or below.
The rating of Credem's OBG would be downgraded by two notches if the relied-upon AP increases to the 93% maximum contractual AP.
ֳ's BE AP for the covered bond ratings will be affected, among other factors, 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 bonds' ratings cannot be assumed to remain stable over time.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The rating of Desio's OBG could be upgraded if Italy's IDR is upgraded and the relevant country rating cap revised higher. This is provided that the AP that ֳ relies on is adequate to withstand stresses associated with the higher rating.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The banks' IDRs are the starting point for ֳ's covered bond rating analysis.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Banco di Desio e della Brianza S.p.A. | EU Issued, UK Endorsed |
| Credito Emiliano S.p.A. | EU Issued, UK Endorsed |