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Dec 6 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Banco Popolare's (BP, BBB/Negative/F3) mortgage covered bonds (obbligazioni bancarie garantite, OBG) at 'BBB+' with a Negative Outlook. The bonds are guaranteed by BP Covered Bond S.r.l. (the guarantor). The affirmation follows a full review of the programme.
KEY RATING DRIVERS
The 'BBB+' rating is based on BP's Long-term Issuer Default Rating (IDR) of 'BBB', a Discontinuity Cap (D-Cap) of 1 (very high risk) and the 80.7% 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 discontinuity risk assessment reflects Fitch's expectation that in a systemic crisis, a deterioration of the sovereign's creditworthiness would be associated with diminishing prospects for interbank liquidity. It also reflects Fitch's view that the extendible maturity of 12 months only provides a limited mitigant against the liquidity gap risk in the programme.
The level of over-collateralisation equivalent to the 80.7% AP the issuer commits to is not sufficient to sustain the rating of the OBG on a probability of default (PD) basis. Furthermore, the transaction account bank is BP, London branch, and the funds held in the account amounted to EUR1.1bn as of end of August 2013, which represents about 10% of the aggregate outstanding balance of the cover pool. Fitch has assessed the exposure and deemed it to be excessive in a jump-to-default scenario of the account bank, in accordance with its current counterparty criteria. As a consequence, the OBG's rating on a PD basis has been capped at BP's IDR, 'BBB'.
The current 80.7% AP commitment would allow the covered bonds to achieve a two-notch uplift on a recovery basis above the 'BBB' rating on a PD basis. Nevertheless, the OBG's rating is constrained to the 'BBB' rating category in line with the replacement provision of BP in its capacity as transaction account bank for the programme. The programme documents stipulate the replacement of the account bank in the event of a downgrade below 'BBB-' (see "Fitch: No Impact on Banco Popolare's Covered Bonds from Programme Amendments" dated 15 January 2013 at www.fitchratings.com).
Fitch has calculated a breakeven AP of 100% for the rating. However, the 93% maximum AP allowed by the programme documentation has been considered as the breakeven AP for the 'BBB+' rating. This level of AP provides for stressed recoveries in excess of 51% on the OBGs assumed to be in default in a 'BBB+' scenario.
As of September 2013, the cover pool consisted of approximately 100,000 residential mortgage loans and the aggregate outstanding principal balance of the cover pool was EUR10.3bn. In a 'BBB+' scenario Fitch has calculated a cumulative weighted average (WA) frequency of foreclosure for the cover assets of 17.8% and a WA recovery rate of 73.3%, which resulted in a WA stressed expected loss of 4.7%.
The OBG programme benefits from an asset swap with Credit Suisse International (CSI, A/Stable/F1) to hedge interest rate mismatches on approximately half of the cover pool. The remainder is unhedged, consisting of fixed (25%) and floating rate (45%) loans as well as loans with switching options (30%). In its cash flow analysis, Fitch has modelled the stressed assets cash flows under its base, low and high interest rates scenarios to reflect the current hedging structure.
Liability swaps are in place between the guarantor and CSI, HSBC Bank Plc (AA-/Stable/F1+), Natixis (A/Stable/F1) and Banco Bilbao Vizcaya Argentaria (BBB+/Stable/F2) to hedge interest rate mismatches between the cover pool and five series of OBG bearing a fixed rate, totalling EUR5.55bn. Series VI due March 2023 and amounting to EUR150m, is unhedged, while the EUR1.75bn series V due December 2013 is floating rate.
The Negative Outlook on BP's IDR and the outlook on Italian residential mortgage loans drive the Negative Outlook on the OBG (see "2014 Outlook: European Structured Finance" dated 4 December 2013 at www.fitchratings.com).
RATING SENSITIVITIES
All else being equal, the OBG's rating of 'BBB+' would be vulnerable to downgrade if BP's IDR was downgraded by three or more notches.The Fitch breakeven AP for the covered bond 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 to remain stable over time.
