London, 13 July 2012 -- Moody's Investors Service has today downgraded eight Italian covered bonds
and placed on review for downgrade the ratings of 13 Italian covered bonds.
Today's downgrades and review placements reflect (i) the weakening of
the Italian government's creditworthiness, as captured by Moody's
downgrade of Italy's government bond ratings to Baa2 from A3 on 13 July
2012; and (ii) the lowering of the country debt ceiling in Italy
to A2. For more details on the rationale for the sovereign downgrade,
please refer to the press release http://www.moodys.com/research/Moodys-downgrades-Italys-government-bond-rating-to-Baa2-from-A3--PR_250567.
During the review, Moody's will assess the degree to which the sovereign
downgrade has the potential to affect the covered bond ratings through
both the expected loss and TPI framework analysis.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF291969
for the List of Affected Credit Ratings.
This list is an integral part of this press release and identifies each
affected issuer.
RATINGS RATIONALE
Today's announcements follow Moody's downgrade of Italy's sovereign rating
to Baa2 from A3. The downgrade of eight Italian covered bonds and
the review for downgrade of 13 covered bonds reflect (i) the potential
negative impact of the sovereign rating on the various components of Moody's
analysis of Italian covered bonds; and (ii) the A2 maximum rating
achievable for covered bonds in Italy as a result of the lowering of the
country debt ceiling to A2.
Firstly, the weakening of the Italian government's creditworthiness,
and the continued weakness of the Italian economy might negatively affect
Moody's expected loss analysis of the covered bonds, through,
amongst other factors (i) the refinancing margins; and (ii) credit-risk
deterioration of the underlying assets. Secondly, the likelihood
of timely payment for the covered bonds could be reduced.
As a consequence of the weakening of the Italian government's creditworthiness
, Moody's has lowered Italy's country debt ceiling to A2.
As a result, no Italian covered bond can be rated above A2.
For full details on the sovereign action on Italy, including on
the country's debt ceiling, refer to the webpage containing
all of Moody's related announcements http://www.moodys.com/EUSovereign.
Moody's review will assess whether the sovereign downgrade might affect
the covered bond ratings through:
(1) The Expected Loss
Moody's will take a view on the increased expected loss borne by the covered
bonds, due to (amongst other factors) the following:
(i) The increased funding costs for the sovereign. Moody's will
thus reconsider the refinancing margins it uses in its analysis of Italian
covered bonds.
(ii) The credit deterioration of the underlying cover pools might accelerate,
especially for public-sector assets, due to the sovereign
downgrade.
However, Moody's notes that issuers may be able to offset any deterioration
in the expected loss analysis if sufficient collateral is held in the
cover pool.
(2) The TPI Framework
As the credit strength of the sovereign declines, the Italian government
and financial institutions may be less able and/or willing to provide
or obtain funds to support the refinancing of covered bonds, after
an issuer default. Following the downgrade of the sovereign,
Moody's will reassess the rating caps under the TPI framework.
Moody's TPI framework limits a covered bond rating to a certain number
of rating levels above the issuer rating of the relevant bank.
The amount of uplift will depend on the TPI assigned and for all Italian
covered bonds, Moody's currently assigns a TPI of "Improbable".
The indicative rating uplift for covered bonds based on TPIs can be found
in Moody's published TPI table. However, Moody's notes that
there are many factors that might influence the application of TPIs,
in particular for sub-investment-grade-rated issuers
-- such as Banca delle Marche -- whose covered
bond ratings are two notches above the Baa2 level indicated by the TPI
table.
The higher final A3 rating of Banca delle Marche was driven by several
factors, including (i) the issuer's Ba1 rating, which is at
the high end of the range indicated by the TPI table for a Baa2 covered
bond rating; (ii) the high level of committed over-collateralisation
(27%); and (iii) a four-year extension period for the
payment of principal under the covered bonds.
KEY RATING ASSUMPTIONS/FACTORS
The ratings assigned by Moody's address the expected loss posed to investors.
Moody's ratings address only the credit risks associated with the transaction.
Other non-credit risks have not been addressed, but may have
a significant effect on yield to investors. Covered bond ratings
are determined after applying a two-step process: an expected
loss analysis and a TPI framework analysis.
- EXPECTED LOSS: Moody's determines a rating based on the
expected loss on the bond. The primary model used is Moody's Covered
Bond Model (COBOL), which determines expected loss as (i) a function
of the issuer's probability of default (measured by the issuer's rating);
and (ii) the stressed losses on the cover pool assets following issuer
default.
- TPI FRAMEWORK: Moody's assigns a TPI, which indicates
the likelihood that timely payment will be made to covered bondholders
following issuer default. The effect of the TPI framework is to
limit the covered bond rating to a certain number of notches above the
issuer's rating.
SENSITIVITY ANALYSIS
The robustness of a covered bond rating largely depends on the issuer's
credit strength.
A multi-notch downgrade of the covered bonds might occur in certain
limited circumstances, such as (i) a sovereign downgrade that negatively
affects both the issuer's senior unsecured rating and the TPI; (ii)
a multi-notch downgrade of the issuer; or (iii) a material
reduction of the value of the cover pool.
As the euro area crisis continues, the ratings of covered bonds
remain exposed to the uncertainties of credit conditions in the general
economy. The deteriorating creditworthiness of euro area sovereigns
as well as the weakening credit profile of the global banking sector could
negatively impact the ratings of covered bonds. For more information
please refer to the Rating Implementation Guidance published on 13 February
2012 "How Sovereign Credit Quality May Affect Other Ratings". Furthermore,
as discussed in Moody's special report "Rating Euro Area Governments Through
Extraordinary Times -- An Updated Summary," published
in October 2011, Moody's is considering reintroducing individual
country ceilings for some or all euro area members, which could
affect further the maximum structured finance rating achievable in those
countries. Moody's is also continuing to consider the impact of
the deterioration of sovereigns' financial condition and the resultant
asset portfolio deterioration in covered bond transactions.
The principal methodology used in these ratings was "Moody's Approach
to Rating Covered Bonds", published in March 2010. Please
see the Credit Policy page on www.moodys.com for a copy
of this methodology.
REGULATORY DISCLOSURES
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF291969
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
• Releasing office
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entities or their designated
agents and issued with no amendment resulting from that disclosure.
Information sources used to prepare the ratings are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
the two years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided
to entities rated by MIS's EU credit rating agencies" on the
ratings disclosure page on our website www.moodys.com for
further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Elise Savoye
Analyst
Structured Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades 8 Italian covered bonds and places 13 on review for downgrade
