OREANDA-NEWS. Fitch Ratings has affirmed Banca Carige S.p.A. - Cassa di Risparmio di Genova e Imperia Siglabile's (Carige, B/Stable/B) EUR2.43bn mortgage covered bonds (Obbligazioni Bancarie Garantite, OBG) at 'BBB-'. The Outlook is Stable. The affirmation follows a full review of the programme.

KEY RATING DRIVERS
The rating is based on Carige's Long-term Issuer Default Rating (IDR) of 'B', an unchanged IDR uplift of 0, an unchanged Discontinuity Cap (D-Cap) of 2 (high risk) and the 80.0% asset percentage (AP) that Fitch takes into account in its analysis, which provides more protection than the revised 86.5% 'BBB-' breakeven AP. The Stable Outlook for the covered bonds rating mirrors that on Carige's IDR.

Fitch has revised downwards the 'BBB-' breakeven AP to 86.5% (corresponding to 15.6% overcollateralisation, OC) from 87.0% (14.9% OC), reflecting the worsened cash flow valuation of -0.2% (from -1.2% previously), which leads to higher overall breakeven OC for the rating. The increase in the cash flow valuation component is driven by the availability of excess spread in the structure, which is more limited than previously.

The major contributor to the breakeven AP is the asset disposal loss component of 12.5%, driven by the high refinancing spreads applied for Italian residential mortgage loans and for small and medium-sized enterprise (SME) mortgage loans (360bps and 460bps, respectively, in a 'BBB-' rating scenario). The credit loss component is stable at 4.7% and reflects the 21.4% weighted average (WA) frequency of foreclosure and the 78.9% WA recovery rate in a 'BBB-' scenario. As of end-April 2015, the EUR4.3bn cover pool comprised 94.1% residential mortgage loans with the remainder 5.9% granted to Italian SMEs.

The cash flow valuation component of -0.2% reflects the interest rate swaps on the asset and on the liability side, which hedges 89% of the cover pool and 97.5% of the OBG. Credit Suisse International (A/Stable/F1) acts as swap counterparty on the asset and liability side.

The D-Cap remains 2 and is driven by the weak link assessment of liquidity gap and systemic risk component.

The unchanged IDR uplift of 0 reflects the covered bonds exemption from bail-in, Fitch's view that Italy is not a covered bonds intensive jurisdiction, the issuer is not systemically important in its domestic market and the agency considers that there is no protection provided by senior unsecured debt in excess of 5% of total adjusted assets.

Fitch takes into account the 80.0% AP which is publicly disclosed in the investor report of April 2015 and used to perform the asset coverage test. This level of AP allows the OBG to make timely payments in a 'BB-' scenario and it is adequate to achieve recoveries given default of the covered bonds of at least 91% in a 'BBB-' scenario.

RATING SENSITIVITIES
The covered bonds 'BBB-' rating would be vulnerable to downgrade if any of the following occurs: (i) Carige's Issuer Default Rating is downgraded by one or more notches to 'B-' or below; or (ii) the number of notches represented by the IDR uplift and the Discontinuity Cap is reduced to one or below; or (iii) the Asset Percentage (AP) that Fitch considers in its analysis increases above Fitch's 'BBB-' breakeven level of 86.5%.

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.