OREANDA-NEWS. Fitch Ratings has placed Banca Monte dei Paschi di Siena S.p.A.'s (BMPS, B-/Stable/B) mortgage covered bonds' (Obbligazioni Bancarie Garantite, OBG) 'BBB-' rating on Rating Watch Positive (RWP).

The RWP follows BMPS's solicitation of consent to approve, among others, the proposed restructuring of the EUR8.32bn OBG to conditional pass-through (CPT) from soft-bullet with a 12-month maturity extension.

Fitch understands that the proposed changes are contingent on investors' approval. Based on the solicitation notice, the initial meeting will be held on 25 June 2015 and, in absence of a valid quorum, will be reconvened on 10 July 2015. Fitch will resolve the RWP upon the implementation of the changes.

KEY RATING DRIVERS
The RWP reflects the upside scenario for the 'BBB-' rating should BMPS restructure the OBG redemption profile to CPT.

In Fitch's view, the proposed restructuring would reduce liquidity gaps and mitigate payment interruption risk for the OBG once recourse against the cover pool is enforced, as would be reflected in the minimal discontinuity assessment for liquidity gaps and systemic risk. However, Fitch's criteria allow for the agency to still apply a "weak-link" analysis between its Discontinuity Dap (D-Cap) components if the assessment of another component raises particular risk.

Fitch deems that some of the amendments to the programme documentation could limit the full rating uplift for a CPT structure and a D-Cap of 8 (minimal discontinuity risk) would be unlikely. In the agency's opinion, the removal of certain guarantee enforcement events (i.e. breach of obligations and cessation of business) and a longer test grace period (five months from one month) result in a strong reliance on the issuer's ability to make timely payments on the OBG until the recourse to the cover assets is enforced, as would be reflected in the alternative management component.

The current 'BBB-' rating is based on BMPS's Long-term Issuer Default Rating (IDR) of 'B-', an unchanged IDR uplift of 1, an unchanged D-Cap of 2 (High risk) and the 77.5% asset percentage (AP) that the issuer publicly discloses in its quarterly investor report and provides more protection than the 'BBB-' breakeven AP of 87%.

RATING SENSITIVITIES
The 'BBB-' rating of the covered bonds would be upgraded if the liability structure of the covered bonds changes to CPT from soft bullet. Nonetheless, it is likely that the covered bonds would remain in the 'BBB' rating category due to the weakening of guarantee enforcement events and test grace period.

The covered bonds would be affirmed at 'BBB-' should the proposed amendments not be implemented.

The Fitch breakeven AP for the covered bond rating will be affected, amongst 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.