Mediobanca SpA (Mortgage Covered Bond)

Transcription

1 Presale: Mediobanca SpA (Mortgage Covered Bond) Primary Credit Analyst: Giovanni Inglisa, Milan (39) ; Secondary Contact: Barbara Florian, Milan (39) ; Table Of Contents Up To Million Fixed-Rate Mortgage Covered Bond Under the Mortgage Covered Bond Program To Be Restructured Program Summary Major Factors Program Outlook: Negative Rationale Program Description Issuer-Specific Factors Cover Pool Specific Factors Additional Factors Related Criteria And Research SEPTEMBER 27,

2 Presale: Mediobanca SpA (Mortgage Covered Bond) Up To Million Fixed-Rate Mortgage Covered Bond Under the Mortgage Covered Bond Program To Be Restructured This presale report is based on information as of Sept. 27, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Table 1 presents our rating following the restructuring. Table 2 Mediobanca SpA (Mortgage Covered Bond)Description Of The Covered Bonds Credit rating* Outstanding amount of covered bonds Expected maturity Obbligazioni Bancarie Garantite - Series 2 A/Stable (prelim) Up to 750 million Up to 10 years *Standard & Poor's ratings addresses timely payment of interest and ultimate payment of principal on the final maturity date. Table 3 Mediobanca SpA Covered Bonds Program Supporting Ratings Mediobanca SpA, as issuer, bank account, and for commingling and set-off risk BBB/Negative/A-2 SEPTEMBER 27,

3 Program Summary Standard & Poor's Ratings Services today assigned its preliminary 'A' credit rating to the up to 750 million fixed-rate mortgage covered bond to be issued under Mediobanca SpA's mortgage covered bond program ("Obbligazioni Bancarie Garantite"). The outlook on our preliminary rating on the new issuance is stable. We currently rate the Mediobanca covered bond program 'BBB' with a negative outlook. That is, we do not grant any uplift from the rating on the issuer Mediobanca (see "Ratings Assigned To Mediobanca's Italian Covered Bond Program And First Issuance," published on Dec. 14, 2011). We have received information of proposals for certain arrangements to the program. Having reviewed this, we have assigned our 'A' preliminary rating to the up to 750 million fixed-rate mortgage covered bond to be issued under Mediobanca's mortgage covered bond program ("Obbligazioni Bancarie Garantite"). Our preliminary rating reflects our level of confidence in the Italian legal framework for the issuance of covered bonds. It also reflects the credit quality of the underlying assets and the adequacy of stressed cash flows to support our rating on the covered bond. After the restructuring, we will withdraw our rating on the outstanding 1.5 billion covered bond (rated 'BBB') as it will be repurchased and netted out. We will also raise the rating on the program to 'A'. Table 4 Based On Data As Of Aug. 31, 2013, assuming a 10 year issuance Jurisdiction Italy Type of covered bonds Structured Underlying assets Mortgages Expected new issuance (bil. ) Up to 0.75 Year of first issuance 2011 Rating at closing/year A/2011 Extendible maturities Yes Target credit enhancement (%) 51.4% Available credit enhancement (%) 119.6% Major Factors The covered bond program will be restructured, and we understand it will be eligible to achieve an uplift from the rating on the issuer. The restructuring will involve--and be subject to--the repurchase of the current 1.5 billion outstanding bond and the issuance of a second up to 750 million bond due in up to 10 years. On completion of the program's restructuring, the program's main features will be: A cover pool featuring a low loan-to-value (LTV) ratio compared with its peers SEPTEMBER 27,

4 Weighted-average foreclosure frequency (WAFF) and weighted-average loss severity (WALS) in line with the Italian market. Non-plain collateral, as it will comprise inflation-linked loans (83.9% of the pool) which, given their particular terms, and the way we analyze them, will lead to a 12.9% additional loss on the pool. A soft-bullet maturity (featuring an available one-year extension). Under our asset liability maturity mismatch (ALMM) criteria, this maturity along with a weighted-average maturity of the assets of 15.4 years, would lead us to assess the program's ALMM risk as "low". Downgrade language for the bank account and the commingling risk and set-off risk, which will cap the maximum achievable rating at 'A' (see "Counterparty risk" section). Program Outlook: Negative The current outlook on the program is negative, in line with the negative outlook on the issuer, Mediobanca. Following the program's restructuring, we expect to revise our outlook on the program to stable from negative. Under our ALMM criteria, the program would feature three unused notches of uplift from our 'BBB' issuer credit rating (ICR) on the issuer (see "Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds," published on Dec. 16, 2009). In our opinion, a downgrade of Mediobanca or a negative reassessment of the ALMM measure would not automatically trigger a change in the rating on the covered bond. Rationale Our covered bond ratings process follows the methodology and assumptions outlined in our "Covered Bond Ratings Framework: Methodology And Assumptions," published on June 26, As part of our analysis, we conducted a review of CheBanca!'s mortgage operations. We believe satisfactory procedures are in place to support our preliminary ratings on the covered bonds. The portfolio comprises solely of Italian residential mortgage loans. For these loans, our weighted-average foreclosure frequency (WAFF) and our weighted-average loss severity (WALS) assumptions are mainly derived from the LTV ratio and the expected market value decline of the property. The weighted-average LTV ratio is equal to 58.4%, which is lower than other similar Italian cover pools. We have reviewed the asset information provided as of Aug. 31, 2013, and have performed a cash flow analysis based on the covered bond program's liability profile. We have applied our five-step approach for rating covered bonds outlined in our ALMM criteria. According to these criteria, and following the restructuring, the covered bond program category of '2' and asset-liability mismatch of "low" results in a maximum ratings uplift of six notches from our long-term ICR on Mediobanca. The maximum rating on the Mediobanca covered bond will be constrained to 'A' due to counterparty risk. Given the bank's current long-term ICR of 'BBB', under our ALMM criteria, three notches of uplift are needed to achieve the maximum 'A' ratings on the covered bonds. Based on our cash flow and market value risk analysis, we believe the target credit enhancement commensurate with the maximum achievable ratings on the covered bonds is SEPTEMBER 27,

5 below the available credit enhancement for the program. We consider country risk by applying our nonsovereign ratings criteria (see "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions," published on June 14, 2011). This covered bonds program has a "low" country risk assessment under these criteria. The maximum amount of uplift from the sovereign rating is six notches for an investment-grade rated sovereign. All of the underlying mortgages in the cover pool are based in Italy. Therefore, country risk does not constrain our preliminary ratings on the covered bonds. Program Description The issuer of the program is Mediobanca. However, the originator and seller of the assets is CheBanca!, which is fully-owned by Mediobanca. Since the program closed in 2011, the rating on the covered bond program has been equalized with the rating on Mediobanca, due to insufficient credit enhancement. Under the terms of the 5 billion program, Mediobanca can issue Obbligazioni Bancarie Garantites (OBGs) that are direct, unsubordinated, unsecured, and unconditional issuer obligations. Hedging agreements between the SPE and Mediobanca cover mismatches between the payments received on the mortgage loans and payments due under the guarantee on the covered bonds. However, we did not give credit to these agreements in our analysis as they do not reflect our current counterparty criteria. Issuer-Specific Factors Legal and regulatory risks Our legal risks assessment follows the assumptions outlined in "Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance," published on Sept 13, A special-purpose entity (SPE)--Mediobanca Covered Bond S.r.l.--guarantees these issuances. The SPE is an Art. 7-bis SPE as defined under Italian Securitization Law. Its sole purpose is to purchase assets and grant a guarantee on the OBGs issued by Mediobanca. If Mediobanca becomes insolvent, the SPE will continue to make payments on the OBGs as they become due. By law, the assets transferred to the SPE are segregated in favor of the OBG holders, the hedging counterparties, and other related transaction counterparties of the SPE. The seller granting the loan to the SPE to finance the purchase of the assets is subordinated to the above-mentioned entities. Operational and administrative risks In August 2013, we reviewed the originator's policies for underwriting, servicing, and monitoring the loans in the cover pool. The bank's business model has not changed since we assigned our rating on the program in 2011, as it is still largely based on origination through brokers and intermediaries (85% of the volumes). CheBanca! closely monitors the performance of these originators. SEPTEMBER 27,

6 The bank has been tightening its underwriting standards, focusing on loans with a LTV ratio of less than 60%. This determined an increase of the loans rejected, which in 2013 have been between 50% and 75% of the total applications received. We consider CheBanca!'s servicing processes to be satisfactory for the purpose of managing the cover pool. Cover Pool Specific Factors Asset credit quality As of Aug. 31, 2013, the pool consists of 1,621.9 million mortgage loans, 2.2 million of which are defaulted loans. Delinquencies (1.65%) are lower than what we generally see in the Italian residential mortgaged-backed securities (RMBS) market (see: "Italian RMBS Index Report Q1 2013: Arrears Remain Broadly Flat, But House Prices Decline Further," published on June 14, 2013). We consider the weighted-average LTV (WALTV) ratio of the pool to be 58.4% (after our adjustments that involve a certain haircut to the historical valuations), still lower than the 60.3% at closing. At the same time, the weighted-average seasoning (WAS) has reached 74.7 months, up from 59 at closing. Most notably, the share of the loans exhibiting a WALTV ratio that is lower than 60% has increased to 51.5% from 41.8%, and the share of the loans seasoned by more than 60 months has increased to 64.2% from 47.8%. The change in these two metrics is the result of the deleveraging of the loans, and is also due to the fact that the transfers of the portfolio, which followed the one at closing, only involved the sale of million. In our view, the cover pool's rapid deleveraging is due to the recalculation of the inflation-linked mortgages instalments. Because the instalments of these mortgages were recalculated by CheBanca! when interest rates were higher, and since they cannot decrease even if the rates decrease--due to a specific feature of the product--they amortize quicker. The cover pool includes 83.9% of variable interest rate mortgage products where the inflation rate caps increases in monthly payments. The lender will recalculate on an annual basis the monthly instalments to be paid by the borrower. If interest rates decrease, the instalment amount remains unchanged and the proportion of each payment allocated to principal increases, with the loan amortizing ahead of schedule. If interest rates increase, the inflation rate caps the increase in the monthly payment. If the interest rate increase exceeds the inflation rate, the proportion of the monthly payment allocated to principal decreases, causing the loan to amortize over a longer period. The lender will recalculate the projected loan amortization schedule when it recalculates each monthly instalment. The loan can be extended for a maximum of five or eight years, depending on the product. If, at the end of this extension period, the loan has not fully amortized, the borrower is not required to repay the remaining outstanding balance and the lender will incur a loss. We have analyzed the characteristics of the loans included in the cover pool in order to assess the potential loss on these products resulting from a stressed evolution of interest rates and inflation. In our cash flow analysis, we have SEPTEMBER 27,

7 applied our principles of credit ratings criteria to calculate an assumed haircut on the balance of inflation-linked mortgages, based on the characteristics of each individual loan (see "Principles Of Credit Ratings," published on Feb. 16, 2011). In our calculation of the assumed loss on each loan, we consider each mortgage loan's scheduled maturity. The closer a loan's amortization is to final maturity, the higher the risk of a loss on the loan. If the projected maturity date is within five years of the maximum extension date, we assume a 60% haircut on the loan's outstanding balance. If the projected maturity date is more than 10 years prior to the maximum extension date, we assume no haircut. If the projected maturity is between five and 10 years before the maximum extension date, we assume a haircut of between 0% and 45%, depending on the three characteristics listed below: The loan's seasoning. The interest rate used to calculate the last monthly instalment. The inflation environment (For further details, see: "Ratings Assigned To Mediobanca's Italian Covered Bond Program And First Issuance," published on Dec. 14, 2011). We have used the characteristics listed above to calculate a haircut assumed on each individual loan. We then calculated a weighted-average haircut on the cover pool, based on the outstanding balance. In our analysis, we have applied a haircut of 18.7% on the outstanding balance of the proportion of inflation-linked mortgages in the cover pool that do not default in our stressed simulations. This haircut is an additional credit stress to those described in our criteria relating to the credit analysis of Italian RMBS (see "Criteria For Rating Italian Residential Mortgage-Backed Securities," published on July 16, 2002, and "Update To The Criteria For Rating Italian Residential Mortgage-Backed Securities," published on Jan. 6, 2009). The currently applied haircut is lower than the one applied at closing (21.5%) because the pool has a lower WALTV ratio, leading to fewer loans whose projected maturity is within five years of the maximum extension. We ran a sensitivity analysis assuming that house prices would drop by a further 10%, leading to an increase in both the pool's foreclosure frequency and loss severity. We found that this stress still allows us to assign a 'A' rating. Payment structure and cash flow mechanics Following the execution of the restructuring, under step 1 of our criteria, we will classify the ALMM risk for the program as "low", in contrast with our current classification of "high". This is mainly due to the smaller size of the loan that Mediobanca plans to issue (up to million bond compared with 1,500 million at closing in 2011). The "low" ALMM risk, coupled with the covered bond program category of '2', results in a maximum ratings uplift of six notches. In this ALMM classification, according to our criteria we assume a constant prepayment rate (CPR) which is based on the characteristics of the underlying mortgage loans. In this analysis, we have assumed a weighted-average CPR of 2.9% for the pool, based on an assumed 5% CPR on variable-rate mortgages, and a lower assumed CPR of 2.5% on loans where the inflation rate caps the increase in monthly payments since, in our view, the likelihood that these loans would prepay is lower than for variable-rate mortgage loans. This is in line with the methodology outlined in "Principles Of Credit Ratings," published on Feb. 16, 2011 The uplift from the rating on the issuer will be constrained to 'A' due to the downgrade language provisions for the bank account and due to the set-off and commingling risks (see "Counterparty risk" section). SEPTEMBER 27,

8 In our analysis, the required OC for a 'A' rating would be up to 51.4%, depending on the maturity of the bond. Of this, up to 45.1% (again, depending on the maturity of the bond) would be required to mitigate credit risk (and therefore to attain a 'BBB+' rating), and the remaining 6.2% would be the cost of two extra notches. The OC figure would be high, both in absolute and relative terms. The high OC requirement is due to: The haircut that we apply to the cover pool because of our analysis of the inflation-linked mortgages, which effectively implies a 12.8% principal loss on Day 1. The treatment of the program as if it were unhedged, due to the reasons outlined in "Counterparty risk". Since we do not give credit to either the cover pool swap, or to the liability swap, following our cash flow analysis we require additional OC (about 20%) than if we were to model the swaps' cash flows. On completion of the restructuring, the program documents will be amended in order to provide the program with a cash reserve that will trap the cash needed to pay the coupon due on the bond on the next payment date. The cash reserve will be replenished at the issuance of each series of bonds. This amendment would address the potential risk of a liquidity shortage, which might arise if the issuer defaults close to a payment date of the bond. Table 5 Cover Pool Composition Asset type --As of date--31/08/ As of date--30/09/2011 Value (mil. ) Percentage of cover pool (%) Value (mil. ) Percentage of cover pool (%) Mortgage type 1 (e.g. residential) 1, , Mortgage type 2 (e.g. commercial) Substitute assets Other asset type Total cover pool assets 1, , Table 6 Aug. 31, 2013 Sept. 30, 2011 Average loan size ( ) 82,688 88,200 Weighted average LTV (% following S&P adjustment) Weighted average loan seasoning (months)* Balance of loans in arrears (%) Buy-to-let loans (% assumed) Self-employed borrowers (% assumed) Credit analysis results: Weighted average foreclosure frequency (WAFF; %) Weighted average loss severity (WALS; %) Asset default risk assuming a 10yr issuance(%) Country average metrics: WAFF (%) SEPTEMBER 27,

9 Table 6 (cont.) WALS (%) Asset default risk (%) LTV--Loan-to-value ratio. N.B. Due to a lack of data on certain loans, we have made assumptions on certain features. Table 7 Cover Assets By Loan Size ( 000s) Aug. 31, 2013 Sept. 30, % 10.8% % 30.7% % 28.6% % 15.0% % 6.8% % 3.1% % 1.6% Above % 3.26% Table 8 Loan-To-Value (LTV) Ratios (%) Aug. 31, 2013 Sept. 30, Above Weighted-average LTV Table 9 Loan Seasoning Distribution (%) Aug. 31, 2013 Sep. 30, 2011 Less than 18 months More than 60 months Weighted-average seasoning* *Seasoning refers to the elapsed loan term. SEPTEMBER 27,

10 Additional Factors Counterparty risk We published updated general counterparty criteria for structured finance transactions as well as covered bond-specific counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013 and "Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions," published on June 26, 2012). Based on these criteria, we classify counterparty risk into four categories: bank accounts, indirect support obligations (in this case the commingling and set-off risks), direct support obligations, and derivatives. We believe that the Mediobanca covered bond program contains counterparty risk mitigants which are consistent with an 'A' rating. We do not consider the transaction documents relating to the swap provider, Mediobanca, to be in line with our updated counterparty criteria. Therefore, we have applied our cash flow models without giving benefit to the swaps. The program's account bank is the issuer, Mediobanca, which will commit to replace itself if the program were to lose its 'BBB' rating. According to our counterparty criteria, this counterparty is categorized as "bank account" and this replacement trigger is suitable to support up to 'A' rated notes. Mortgage payments from borrowers in the cover pool are paid by direct debit into collection accounts at CheBanca!. This exposes the program to "commingling" risk, i.e., if CheBanca! were to become insolvent, these collections could be lost or temporarily delayed. In addition, "set-off" risk indicates that the underlying obligor not only owes money to the institution under the mortgage sold to the cover pool, but is also owed money by the financial institution with which it has various current and deposit accounts. Commingling and set-off risk exposure will be addressed through the asset coverage test, limiting the maximum amount of covered bonds that can be issued: If the ICR on Mediobanca is equal to 'BBB-' and the exposure is higher than 5% of the cover pool, the ACT will account for the excess if the exposure exceeds 5%; If Mediobanca were to lose its 'BBB-' rating, the ACT would account for the whole exposure; As long as Mediobanca is rated 'BBB' or above, the ACT would not account for commingling and set-off risks; and According to our current counterparty criteria, these downgrade provisions are suitable to support up to 'A' rated notes. Upon completion of the program's restructuring, the maximum rating on the Mediobanca bond will therefore be constrained to 'A'. Country risk Under our criteria for rating nonsovereign issuers and structured finance transactions (including covered bonds) above the rating on the related sovereign in the eurozone, the mortgage covered bond issued by Mediobanca will have a "low" country-risk exposure, resulting in a maximum uplift of six notches above our unsolicited long-term rating on the Republic of Italy (BBB/Negative/A-2). Therefore, any downgrade of the Republic of Italy of three notches or less would not constrain our rating on Mediobanca's covered bond or program (see "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions," published on June 14, 2011). SEPTEMBER 27,

11 Table 10 Asset-Liability Maturity Mismatch (ALMM) Metrics assuming a 10 year issuance Aug. 31, 2013 Sept. 30, 2011 Asset WAM (years) Liability WAM (years) Maturity gap (years) ALMM (%) 0% 53.7% ALMM classification Low High Maximum uplift above issuer rating (notches) 6 0 Target credit enhancement for maximum uplift (%) 10y: 60.7 (AA) 7y: 58.1 (AA) 5y: 60.3 (AA) 48.3 (AAA) Target credit enhancement for 'A' rating (%) 10y: 51.4; 7y: 48.5; 5y: 47.1 N/A Target credit enhancement for first notch of uplift (%) 10y: 45.1 (BBB+) 7y: 42.1 (BBB+) 5y: 38.3 (BBB+) 43.8% (A+) Available credit enhancement (%) % 12.40% Related Criteria And Research Related criteria Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Covered Bond Ratings Framework: Methodology And Assumptions, June 26, 2012 Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions, May 31, 2012 Global Investment Criteria For Temporary Investments in Transaction Accounts, May 31, 2012 Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised Methodology And Assumptions For Target Asset Spreads, April 24, 2012 Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 Principles Of Credit Ratings, Feb. 16, 2011 Methodology: Credit Stability Criteria, May 3, 2010 Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds, Dec. 16, 2009 Methodology And Assumptions: Update To The Criteria For Rating Italian Residential Mortgage-Backed Securities, Jan. 6, 2009 Methodology And Assumptions: Update To The Cash Flow Criteria For European RMBS Transactions, Jan. 6, 2009 Cash Flow Criteria For European RMBS Transactions, Nov. 20, 2003 Related research Methodology and Assumptions: Advance Notice Of Proposed Criteria Change: Ratings Above The Sovereign--Structured Finance, April 12, 2013 Ratings Assigned To Mediobanca's Italian Covered Bond Program And First Issuance, Dec. 14, 2011 Italian RMBS Index Report Q1 2013: Arrears Remain Broadly Flat, But House Prices Decline Further, June 14, 2013 Additional Contact: Covered Bonds Surveillance; CoveredBondSurveillance@standardandpoors.com SEPTEMBER 27,

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