July 30 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Banca Carige's (Carige, BB/Negative/B) EUR3.561bn mortgage covered bonds (obbligazioni bancarie garantite, OBG) 'BBB+'/Negative rating and has placed Banca Popolare di Milano (BPM, BBB-/RWN/F3) EUR2.790bn OBG 'A-' rating on Rating Watch Negative (RWN) The rating actions follow the downgrade of Carige's Issuer Default Rating (IDR) to 'BB'/Negative/'B' from 'BB+'/Negative/'B' and the RWN placed on BPM's IDR (see "Fitch Takes Rating Action on Italian Mid-Sized Banks" dated 26 July 2012 at www.fitchratings.com). The RWN on BPM's covered bonds will be resolved upon the resolution of the RWN on the bank's IDR.
KEY RATING DRIVERS
The RWN on BPM's outstanding OBGs directly reflects the RWN on the bank's IDR as the current ratings of the OBGs do not include any buffer against a downgrade of the IDR.
The rating of BPM's OBG is based on the bank's Long-term IDR, an unchanged Discontinuity Cap (D-Cap) of 1 and the asset percentage (AP) which the bank commits to (72%), which corresponds to the 'A-' breakeven level.
Despite the downgrade of Carige's IDR, the unchanged D-Cap of 1 and the AP that the bank commits to (80%) still allow the OBG to be rated 'BBB+'. In line with Fitch's methodology, for stressed recoveries estimated in the 91%-100% range, the uplift for recoveries stemming from the residual cover pool post issuer insolvency, can reach up to three notches above the covered bonds rating on a probability of default (PD) basis if it is in the sub-investment-grade range. The breakeven AP for the 'BBB+' rating remains unchanged at 80%.
In June, Carige transferred approximately EUR600m of additional residential mortgages to the cover pool. The cash flows deriving from the newly transferred assets will not form part of the hedging agreement currently in place with Credit Suisse International (A/Stable/F1). Fitch has taken into account the possible interest rate mismatches between the unhedged assets and the floating interest rate paid to the liability swap counterparty in its cash flow analysis.
The Negative Outlook on Carige's Long-term IDR and the outlook for Italian residential mortgage loans (see "2013 Outlook: European Structured Finance" at www.fitchratings.com) drive the Negative Outlook for the OBG.
The rating of the OBGs issued by BPM and Carige are vulnerable to downgrade if one of the following occurs: (i) the Long-Term IDR of the bank is downgraded by one or more notches, (ii) the D-Cap falls to zero or (ii) the programme AP exceeds the respective breakeven AP for the ratings.
Fitch's breakeven AP for the covered bonds ratings 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 to remain stable over time.