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Fitch Rates Banca Popolare di Sondrio's OBG 'A(EXP)'; Outlook Negative
July 28, 2014 / 1:36 PM / 3 years ago

Fitch Rates Banca Popolare di Sondrio's OBG 'A(EXP)'; Outlook Negative

(The following statement was released by the rating agency) MILAN/BARCELONA/LONDON, July 28 (Fitch) Fitch Ratings has assigned Banca Popolare di Sondrio - Societa Cooperativa per Azioni's (BPS, BBB/Negative/F3; Viability Rating, bbb) first Italian mortgage covered bonds (Obbligazioni Bancarie Garantite, OBG) a 'A(EXP)' rating with a Negative Outlook. The expected rating is based on a hypothetical issuance of up to EUR500m with a five-year maturity. The assignment of the final rating is contingent upon receipt of final documents and legal opinions conforming to the information already received. KEY RATING DRIVERS The 'A(EXP)' rating is based on BPS's Long-Term (LT) Issuer Default Rating (IDR) of 'BBB', an IDR uplift of '0', a Discontinuity Cap (D-Cap) of '1' (very high risk) and the undertaking of the issuer to maintain a maximum asset percentage (AP) of 78.7%, as published in its quarterly investor report. The Negative Outlook on the OBG issued by BPS reflects that on the bank's LT IDR. The D-Cap of '1' reflects Fitch's 'very high' discontinuity risk assessment related to the 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 believes that a successful sale of the cover assets would be challenging within the extendible maturity of 12 months, which is envisaged in the documentation to make timely payments on the covered bonds. The breakeven AP for the 'A(EXP)' rating is 80% (equivalent to 25% breakeven over-collateralisation (OC)). This is driven by the asset disposal loss component that counts for 18.3% breakeven OC, due to the large maturity mismatch between assets and the single liability, and Fitch's fairly high refinancing spread assumptions for Italian residential mortgages, which stand at 390bps for the 'A' scenario. The cash flow valuation component of 3.8% reflects the open interest rate position (14.3%) between assets and liabilities, which leads to Fitch's increasing interest rates scenario being the most stressful for this programme. In addition, the covered bonds have a shorter weighted average (WA) life of five years (excluding the principal maturity extension) than the WA life of the cover assets of 8.6 years, at closing. The cover pool's credit loss component increases the breakeven OC by 4.6% and reflects the 'A(EXP)' WA foreclosure frequency (FF) of 20.9% and a WA recovery rate (RR) of 78.9% for the cover pool. The WAFF mostly reflects that about 40% of the cover pool comprises loans to individuals classified as artisans and family-run businesses, for which Fitch has assumed a higher default probability by 30%. This is to account for the risk that those borrowers' affordability may be more volatile and prone to economic shocks, similar to self-employed borrowers. The WARR is a representation of the geographic distribution of the cover pool, which is mostly located in northern Italy. Fitch looks for a minimum level of recoveries given default of 91% in its 'A' scenario. This expected level of recoveries, achieved with the 78.7% AP Fitch relies on, supports a two-notch uplift from the 'BBB+' rating on a probability of default (PD) basis, which Fitch tests for timely payment on the covered bonds. This recovery impact, along with Fitch publishing the asset disposal loss component in line with the 'BBB+' rating on PD basis, leads to a lower 'A(EXP)' breakeven OC than the sum of the components. Fitch takes into account AP the issuer commits to in its quarterly investor report, as BPS's Short-term IDR is below 'F2'. RATING SENSITIVITIES The 'A(EXP)' rating would be vulnerable to downgrade if any of the following occurs: (i) the LT IDR of BPS is downgraded by one or more notches to 'BBB-' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to 0; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'A(EXP)' breakeven level of 80%. Furthermore, if the programme AP reaches the maximum level allowed by the Italian covered bonds law of 100%, BPS's OBG would be downgraded by two notches to 'BBB+'. The 'A(EXP)' rating on the OBG issued by BPS is also vulnerable to a one-notch downgrade if the programme AP reaches 88%, the maximum level allowed by the documentation. The Fitch breakeven AP for the covered bond rating will be affected, amongst 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. More details on the portfolio and Fitch's analysis will be available in a presale report, which will shortly be available at More details on how Fitch analyses the components of the breakeven OC at the covered bond rating level can be found in the special report Breaking Down Breakeven Overcollateralisation, which is available at Contact: Primary Analyst Roberto Del Ragno Analyst +39 02 87 90 87 206 Fitch Italia S.p.A. Via Morigi, 6 - Ingresso Via Privata Maria Teresa, 8 Milan, 20123 Secondary Analyst Paolo Sala Associate Director +39 02 87 90 87 292 Committee Chairperson Carmen Munoz Senior Director +34 93 323 8408 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: Additional information is available on Applicable criteria, 'Covered Bonds Rating Criteria', dated 10 March 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds', dated 14 May 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', dated 14 May 2014, 'Covered Bond Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum', dated 4 February 2014, 'EMEA Residential Mortgage Loss Criteria', dated 28 May 2014, 'EMEA RMBS Master Rating Criteria', dated 28 May 2014, 'Criteria Addendum: Italy', dated 5 March 2014 and 'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds', dated 23 January 2014, are available at Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Covered Bonds Rating Criteria – Mortgage Liquidity and Refinancing Stress Addendum here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here EMEA Residential Mortgage Loss Criteria here EMEA RMBS Master Rating Criteria here Criteria Addendum: Italy - Residential Mortgage Loss and Cash Flow Assumptions here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds here Breaking Down Breakeven Overcollateralisatihere 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.

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