London, 13 April 2012 -- Moody's Investors Service has today downgraded the covered bonds
issued by Cassa Depositi e Prestiti SpA (CDP) to Aa2 from Aa1 on review
for downgrade. The rating action is driven by the currency redenomination
risk that the bondholders are exposed to (despite amendments to the programme),
and is in line with Moody's decision to lower the highest achievable
structured finance rating in Italy to Aa2.
The rating action concludes the review that Moody's initiated on
6 October 2011.
RATINGS RATIONALE
This rating action follows (i) Moody's decision to lower the highest achievable
structured finance rating in Italy to Aa2 from Aaa; and (ii) the
conclusion of a series of programme amendments and actions that occurred
after the ratings of these covered bonds were downgraded to Aa1 and placed
on review for further downgrade on 6 October 2011:
(i) Late 2011, the issuer exercised the Voluntary Programme Termination
(VPT) option. Combined with some amendments introduced at that
time, this led to the full cash-collateralisation of the
future payment obligations (principal and interest) on the then-outstanding
covered bonds. The covered bonds are now guaranteed by an amount
of cash sufficient to cover future payment obligations and the cash is
invested in eligible investments. The public-sector loans
originated by CDP initially securing the covered bonds have been removed
from the structure and in accordance with the VPT, no new covered
bond series can be issued under this programme.
(ii) CDP's rating was downgraded to A3 from A2 on 16 February 2012.
(iii) A tender offer on the outstanding covered bonds was launched on
2 February 2012. After its conclusion on 19 March 2012, only
one series of covered bonds remains outstanding (for 85.4%
of initial series balance). The maturity of this series is 31 January
2013.
As noted in Moody's Special Comment entitled "Rising Severity of Euro
Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns"
(28 November 2011), the risk of sovereign defaults or the exit of
countries from the euro area is rising. As a result, Moody's
has lowered the maximum achievable rating for covered bonds transactions
in Italy to Aa2. This rating is the rating beyond which structural
features or credit enhancement provided by any domestic party cannot mitigate
the impact of possible severe events, such as redenomination risk,
and the level of uncertainty surrounding such events.
Moody's considers the cash-collateralisation --
combined with the short remaining maturity of the outstanding series --
as credit positive. However, because of the incorporation
of domestic counterparties in the programme, such as account banks,
redenomination risk (though remote) has not been completely offset and
is not implausible.
EXPECTED LOSS METHOD:
As the issuer's credit strength is incorporated into Moody's expected
loss assessment, any downgrade of the issuer's rating will increase
the expected loss on the covered bonds. 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.
Moody's considers over-collateralisation to be "committed" if the
issuer's discretion to remove the collateral is sufficiently restricted.
TPI FRAMEWORK: The TPI framework limits the covered bond ratings
to a certain number of notches above the senior debt ratings of the banks
supporting the covered bonds. This level is determined by the relationship
between the TPI and the senior debt ratings of the banks supporting the
covered bonds. Given the full cash-collateralisation of
the future payments due to the covered bonds, Moody's considers
that the TPI framework is no longer relevant for this programme because
refinancing risk is fully mitigated. As a consequence the TPI of
"Improbable" has been removed.
Aside from TPI considerations, country risk constrains the covered
bond ratings at Aa2. For further information please refer to "Moody's
lowers the highest achievable covered bond ratings in Italy, Portugal
and Spain following the recent sovereign rating actions",
dated 23 February 2012.
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 timely payment indicator
(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 credit
strength of the underlying issuer. 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 of the domestic counterparties; or (iii) a material
reduction of the value of the cover pool.
As the euro area crisis continues, the covered bond ratings 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
affect 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". Please
also refer to the recent rating actions on banks published on 15 February
2012, (please see "Moody's Reviews Ratings for European Banks" and
"Moody's Reviews Ratings for Banks and Securities Firms with Global Capital
Markets Operations" for more information).
RATING METHODOLOGY
The principal methodology used in this rating 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
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 rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating 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
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
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the lead rating analyst and to the Moody's legal entity that has issued
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Elise Savoye
Analyst
Structured Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
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Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
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Moody's downgrades covered bonds of Cassa Depositi e Prestiti to Aa2
