TEXT - Fitch cuts Banca Popolare di Milano's mortgage covered bonds
(The following statement was released by the rating agency)
July 26 - Fitch Ratings has downgraded Banca Popolare di Milano's (BPM, 'BBB'/Negative/'F3') Obbligazioni Bancarie Garantite (OBG) rating to 'A' from 'AA' and maintained the Rating Watch Negative (RWN). The bonds were placed on RWN in October 2011 (see "Fitch Places 7 Italian Mortgage Covered Bonds on RWN", dated 12 October 2011 and available at www.fitchratings.com), however the RWN is now due to different reasons. The combination of the Issuer's Long-term Issuer Default Rating (IDR) of 'BBB' and the 29.0% Discontinuity Factor (D-Factor) assigned to the OBG programme could allow the OBG to be rated as high as 'A+' on a pure probability-of-default (PD) basis, and up to 'AA' when giving credit for recoveries on the OBG assumed to be in default, provided sufficient overcollateralisation is available to sustain such level of stresses. The level of asset percentage (AP) of 71.5% which the issuer commits to publicly in its performance test report only allows the OBG to be rated as high as 'BBB' on a pure PD basis and 'A-' taking into account recoveries. However the issuer has pledged to commit publicly, within a few weeks, to a level of AP of 71%. This lower level allows the OBG to be rated as high as 'BBB+' on a pure PD basis and 'A' when giving credit for outstanding recoveries on the OBG assumed to be defaulted in the stress scenario. The level of AP supporting the rating, currently 71%, is in line with the one the issuer has pledged to commit to, and will be affected by, among other things, the profile of the cover assets relative to outstanding OBG, which can change over time, even in the absence of new issuance, and it cannot be assumed to remain stable over time. The RWN is driven by the uncertainties and possible delays concerning the process the issuer will carry out to commit to such AP level. The issuer has communicated that, in the next few weeks, the guarantor will purchase substitute eligible assets using the proceeds of a subordinated loan from BPM. These additional substitute assets will then allow the issuer to commit to a 71% AP. Fitch will monitor the evolution of the issuer's action and resolve the RWN during the next few weeks. The rating action follows the revision of refinancing spreads assumptions, which are used to estimate the stressed sale price for the portion of the cover pool that an alternative manager would liquidate in the aftermath of an issuer default. The net present value (NPV) of cover pools is determined discounting the value of the assets at a rate in line with the revised refinancing spreads. The NPV of the assets is now lower as refinancing spreads have widened on the back of sovereign debt crises. All else being equal, the OBG rating could be maintained at 'A' as long as the issuer's Long-term IDR is at least 'BBB-'. In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome. For all of Fitch's Eurozone Crisis commentary go to here (Caryn Trokie, New York Ratings Unit)
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