OREANDA-NEWS.  Fitch Ratings has upgraded Banca Monte dei Paschi di Siena SpA's (BMPS, B-/Stable/B) mortgage covered bonds (Obbligazioni Bancarie Garantire, OBG) to 'BBB' from 'BBB-' and removed them from Rating Watch Positive (RWP). The Outlook is Stable.

The rating actions follow the restructuring of the OBG to a conditional pass-through (CPT) from a soft bullet liability structure on14 July 2015. BMPS carried out the amendments having obtained the consent by 97.53% of the covered bond holders participant to the extraordinary meeting on 25 June 2015. Fitch originally placed the OBG on RWP upon BMPS's solicitation of consent to approve the restructuring to CPT (see 'Fitch Puts BMPS OBG on RWP on Proposed Restructure to Conditional Pass-Through' dated 08 June 2015 at www.fitchratings.com)

KEY RATING DRIVERS
The 'BBB' rating is based on BMPS's Long-term Issuer Default Rating (IDR) of 'B-', an unchanged IDR uplift of 1, a revised Discontinuity Cap (D-Cap) of 3 (Moderate High) from 2 (High) and the 77.5% asset percentage (AP) the issuer publicly commits to, which provides more protection than the revised 90% breakeven AP for the 'BBB' rating. The Stable Outlook on the OBG mirrors that on BMPS's IDR.

The D-Cap of 3 reflects Fitch's moderate high risk assessment related to the systemic alternative management component. This now constitutes the "weak link" among the discontinuity risk components analysed by Fitch. The agency believes that the removal of certain guarantee enforcement events and a longer five-month test grace period result in a strong reliance on the issuer's ability to service payments due on the OBG and could pose risks on a timely enforcement of the cover pool as a source of payments.

Fitch has revised to minimal discontinuity from high the discontinuity risk assessment related to the liquidity gap and systemic risk component, which previously constituted the weak link for this programme's D-Cap. This change recognises that the restructuring removes the need to refinance assets in order to meet timely payments on covered bonds, should the recourse switch to the cover pool. The other D-Cap components, namely asset segregation (moderate), cover pool-specific alternative management (moderate) and privileged derivatives (low), remain unchanged.

The greatest contributor to the 90% 'BBB' breakeven AP (equivalent to an overcollateralisation (OC) of 11.1%) is the cash flow valuation component of 10.6%. It reflects the cost of carry arising from the defaulted loans' recovery lag of 26 quarters that Fitch assumes on the portfolio in an increasing interest rate scenario, which is the most stressful for this programme.

In addition, it is driven by the presence of capped floating rate loans (almost 59% of the cover pool), which increase interest rate mismatches in the programme. In its cash flow analysis, Fitch models these loans as fixed rate at the weighted average cap rate. Around 87% of the fixed rate liabilities are hedged into floating rate via liability swaps between the guarantor and Societe Generale (A/Stable/F1), UBS Limited (A/Stable/F1) and The Royal Bank of Scotland PLC (BBB+/Stable/F2).

The credit loss component of the 'BBB' breakeven OC represents 5.4%.

The asset disposal loss component is zero and reflects the absence of a forced asset sale given the CPT feature of the programme.

The 77.5% AP that the issuer publicly commits to in its payment report (June 2015) is adequate to make timely payments in a 'BB' stress scenario, which is the tested rating on a probability of default basis, and allows achieving recoveries given default on the covered bonds of at least 91% in a 'BBB' scenario.

RATING SENSITIVITIES
The 'BBB' rating would be vulnerable to downgrade if any of the following occurs: (i) the Issuer Default Rating (IDR) of Banca Monte dei Paschi di Siena SpA is downgraded by one or more notches to 'CCC' or below; or (ii) the number of notches represented by the IDR uplift and the Discontinuity Cap is reduced to 3; or (iii) the asset percentage (AP) that Fitch considers in its analysis increases above Fitch's 'BBB' breakeven level of 90%.

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.