Fitch Downgrades BPM's OBG to 'BBB+'; Outlook Negative

Tue Nov 19, 2013 11:48am EST

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(The following statement was released by the rating agency) MILAN/LONDON, November 19 (Fitch) Fitch Ratings has downgraded Banca Popolare di Milano's (BPM; BB+/Negative/B) mortgage covered bonds (obbligazioni bancarie garantite, OBG) to 'BBB+' from 'A-' and removed the programme from Rating Watch Negative (RWN). The Outlook is Negative. The rating actions follow the downgrade of BPM's Long-term Issuer Default Rating (IDR) to 'BB+'/Negative from 'BBB-'/RWN (see "Fitch Downgrades Banca Popolare di Milano to 'BB+'; Viability Rating to 'bb-'/RWN" dated 18 November 2013 at KEY RATING DRIVERS The OBG's 'BBB+' rating is based on BPM's IDR of 'BB+', a Discontinuity Cap (D-Cap) of 1 (very high discontinuity risk assessment) and the 81.5% level of asset percentage (AP) the issuer commits to in its test performance report. The unchanged D-Cap of 1 is driven by the agency's liquidity gap and systemic risk assessment. The 'very high' risk assessment reflects Fitch's expectation that in a systemic crisis, deterioration of a sovereign's creditworthiness would be associated with diminishing prospects for interbank liquidity. It also reflects Fitch's view that the extendible maturity of up to 12 months only provides a limited mitigant against the liquidity gap risk in the programme. The AP publicly disclosed by the issuer is below the breakeven AP calculated by Fitch for a 'BBB+' rating, which stands at 82%. This level of AP allows the OBG to achieve two notches on a recovery basis above the 'BBB-' rating on a probability of default (PD) basis. The breakeven AP has marginally increased to 82% from 81.5% due to the stressed cash flows being analysed at 'BBB+', one notch down from the previous 'A-' (see "Fitch Upgrades 1 Italian OBG Programme; Affirms 6 and Maintains 1 on RWN", dated 18 October 2013 at The Negative Outlook on the OBG is driven by the Negative Outlook on BPM's IDR and the outlook for the Italian residential mortgage market. RATING SENSITIVITIES All else being equal, the OBG's 'BBB+' rating would be vulnerable to downgrade if BPM's IDR was downgraded by two or more notches. If the D-Cap fell to zero or the programme AP went above the Fitch breakeven AP of 82%, the 'BBB+' rating would not be affected. However, in that scenario the payments of the bonds would not be timely and the OBG would be rated on a recovery basis only, as the PD rating would be at the same level as the IDR of the issuer. According to Fitch's covered bond master criteria, an uplift of up to three notches can be granted above the rating of the covered bonds on a PD basis, provided that rating is in the sub-investment grade category. The Fitch breakeven AP for the OBG 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 issuances. Therefore it cannot be assumed that the breakeven AP will remain stable over time. Fitch will monitor the actions that BPM will take to meet its contractual obligations as asset swap counterparty to the OBG programme. Contact: Primary Analyst Roberto Del Ragno Analyst +39 02 87 90 87 206 Fitch Italia S.p.A. Vicolo Santa Maria alla Porta, 1 Milan 20123 Secondary Analyst Paolo Sala Analyst +39 02 87 90 87 292 Committee Chairperson Federica Fabrizi Senior Director +39 02 87 90 87 232 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: Additional information is available at Applicable criteria, 'Covered Bonds Rating Criteria', dated 04 September 2013, 'Counterparty Criteria for Structured Finance and Covered Bonds', dated 13 May 2013, 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', dated 13 May 2013, 'EMEA Criteria Addendum - Italy', dated 30 July 2013, 'EMEA Residential Mortgage Loss Criteria', dated 7 June 2013, 'EMEA RMBS Master Rating Criteria', dated 6 June 2013 and 'Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum', dated 03 June 2013 are available at Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here EMEA Criteria Addendum - Italy here EMEA Residential Mortgage Loss Criteria here EMEA RMBS Master Rating Criteria here Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.