OREANDA-NEWS. Fitch Ratings has taken various rating actions on the Italian mortgage covered bond programmes (Obbligazioni Bancarie Garantite, OBG) issued by Unione di Banche Italiane - UBI Banca (UBI, BBB/Stable/F3; Viability Rating (VR): bbb) and UniCredit S.p.A. (UC, BBB+/Stable/F2; VR: bbb+), as follows:

UBI OBG guaranteed by UBI Finance S.r.l. (UBI Finance) downgraded to 'A' from 'A+'; placed on Rating Watch Negative (RWN)

UBI OBG guaranteed by UBI Finance CB 2 S.r.l. (UBI Finance CB 2) affirmed at 'BBB+'; Outlook revised to Stable from Negative

UC OBG guaranteed by UniCredit BpC Mortgage S.r.l. (UC Soft Bullet) affirmed at 'AA- '; Outlook revised to Stable from Negative

There is no impact on the 'AA+'/Stable rating of UC conditional pass-through OBG guaranteed by UniCredit OBG S.r.L. as the programme is already on Stable Outlook (see "Fitch Upgrades UniCredit Conditional Pass-Through OBG to 'AA+'; Outlook Stable" dated 23 December 2014 available at www.fitchratings.com).

KEY RATING DRIVERS - UBI Finance
The 'A'/RWN is based on UBI's IDR of 'BBB', an unchanged IDR uplift of 0, an unchanged Discontinuity Cap (D-Cap) of 1 (very high risk) and the 72.9% asset percentage (AP) that Fitch currently takes into account in its analysis, which provides more protection than the revised 84.5% 'A' breakeven AP (up from the previous 81% at 'A+').

Fitch based its analysis on the highest nominal AP of the last 12 months (72.9% as of December 2014), pending the issuer's decision to formalise a public AP commitment, following the bank's Short-term (ST) IDR downgrade to 'F3'. Fitch expects an AP commitment decision before end-April, which is when the agency will resolve the RWN. The RWN reflects the downside risk on the 'A' rating if the issuer does not commit to any AP level lower than the 93% contractual AP.

The 'A' breakeven AP of 84.5% (equivalent to 18.3% overcollateralisation (OC)) is driven by an asset disposal loss of 11.1% (down from 12.4% at 'A+'), followed by the credit loss component of 8.8% (down from 10% at 'A+') and by a cash flow valuation component of 1.5% (down from 4.2% at 'A+').

The 72.9% AP which Fitch relies upon is enough to achieve a two-notch uplift from the 'BBB+' tested rating on a probability of default (PD) basis, by providing recoveries given default of at least 91% in a 'A' scenario.

UBI acts as swap counterparty for all the liability swaps hedging 70% of the notional of the fixed-rate OBG outstanding; Fitch continues to consider UBI as eligible swap counterparty as collateral posting is in place.

KEY RATING DRIVERS - UBI Finance CB 2
The 'BBB+' rating is based on UBI's IDR of 'BBB', an unchanged IDR uplift of 0, an unchanged D-Cap of 0 (full discontinuity risk) and the 100% contractual AP that Fitch takes into account in its analysis. The Outlook revision to Stable from Negative mirrors the Stable Outlook on UBI's IDR following the bank's downgrade.

The 100% contractual AP provides at least 51% recoveries on the covered bonds assumed to be in default in a 'BBB+' allowing a one-notch uplift from the 'BBB' tested rating on a PD basis.

Fitch continues to rely on the 100% contractual AP as the issuer's ST IDR is 'F3'and no AP commitment is in place .

KEY RATING DRIVERS - UC Soft Bullet
The 'AA-' rating is based on UC's IDR of 'BBB+', an unchanged IDR uplift and Discontinuity Cap (D-Cap) of 1 and the 63.6% AP that Fitch takes into account in its analysis, which provides more protection than the unchanged 80.5% 'AA-' breakeven AP. The Outlook revision to Stable from Negative for the OBG rating mirrors that on the issuer's IDR.

The 63.6% AP which Fitch relies upon allows the covered bonds to achieve a two-notch recovery uplift from the 'A' tested rating on a PD basis and provides recoveries in excess of 90% on the covered bonds assumed to default in a 'AA-' rating scenario.

The 63.6% AP as of September 2014 that Fitch took into account is the highest nominal AP of the last 12 months; the agency relies on the highest nominal AP of the last 12 months because the issuer's ST IDR is 'F2'.

RATING SENSITIVITIES - UBI Finance
The 'A'/RWN rating of UBI OBG guaranteed by UBI Finance CB is vulnerable to downgrade if the issuer will not commit to an AP level lower than the current 93% contractual AP, leading to an OBG's rating of 'BBB+'.

In addition the OBG rating is vulnerable to downgrade if: (i) UBI's IDR is downgraded by one or more notches to 'BBB-' or below, or (ii) the number of notches represented by the IDR uplift and D-Cap is reduced to zero.

RATING SENSITIVITIES - UBI Finance CB 2
The 'BBB+' rating of UBI OBG guaranteed by UBI Finance CB 2 is vulnerable to downgrade if the issuer is downgraded by one or more notches to 'BBB-' or below.

RATING SENSITIVITIES - UC Soft Bullet
The 'AA-' rating of UC Soft Bullet OBG is vulnerable to downgrade if: (i) the issuer is downgraded by one or more notches to 'BBB' or below, (ii) the number of notches represented by the IDR uplift and D-Cap is reduced to one or (iii) the AP which Fitch gives credit to increases above the 80.5% 'AA-' breakeven AP .

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 issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.