Fitch Ratings has affirmed Mediobanca Banca di Credito Finanziario S.p.A's (BBB/Stable/F3) mortgage covered bonds (Obbligazioni Bancarie Garantite, OBG) at 'AA' with a Stable Outlook.

KEY RATING DRIVERS

The OBG's 'AA' rating is based on Mediobanca's Long-Term Issuer Default Rating (IDR) of 'BBB', the various uplifts above the IDR granted to the programme and the over-collateralisation (OC) protection provided through the programme's asset percentage (AP).

The OBG are rated at their maximum achievable rating in line with Italy's Country Ceiling of 'AA'. Moreover, the documented counterparty provisions on the account bank support a maximum timely payment rating level of 'A+' for the covered bonds, constraining the programme's rating. The Stable Outlook on the OBG's rating reflects the buffer against an issuer downgrade and mirrors the Outlook on Italy's sovereign 'BBB' IDR.

The covered bonds are rated six notches above the bank's Long-Term IDR. This is out of a maximum achievable uplift of 10 notches, consisting of a resolution uplift of two notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of two notches.

In its analysis, Fitch relies on the highest level of AP recorded in the past 12 months, which is 72.3% as of end-September 2023. This provides more protection than Fitch break-even AP for the rating, which is 83.0%.

OC Protection

The revised 'AA' break-even AP of 83.0% (down from 85.5% previously) is equivalent to an OC of 20.5% and considers an asset-and-liability mismatch (ALM) loss of 18.0% (versus 14.4% previously) and an unchanged credit loss of 2.5%, which reflects the stable cover pool composition.

The revision of the ALM loss was driven by an increased share of fixed-rate loans (65.6% as at September 2023, +4.8pp year-on-year). The net present value of fixed-rate assets is below par in an increasing interest-rate scenario, which is the driving scenario for the rating. Fitch considers unhedged assets and liabilities in its cash flows analysis, as derivative contracts do not have counterparty downgrade provisions. The cover pool and the covered bonds are then modelled based on their current interest rates. The OBG are 100% fixed-rate, while the cover pool also contains floating for life (28.7%), optional (4.7%) and floating-with-cap loans (1.0%).

The analysis considers the presence in the cover pool of inflation-linked loans (24.5%; down from 25.7% at last review). For these loans, the instalment amount, which comprises interest and principal, resets every 12 months and its increase is capped at the inflation rate at that point. Changes in interest rates at the reset date may determine a slower or faster principal repayment.

For inflation-linked loans originated before 1 May 2018 (46.7% of these loans), any principal left unpaid 10 years after the original redemption date is taken as a loss by the originator. For those originated after 1 May 2018, any remaining principal 10 years after the original redemption date will be repaid via a French amortisation schedule with a further maturity extension of up to five years.

In an increasing interest-rate scenario, the amortisation profile of inflation-linked loans is stressed assuming an inflation rate equal to half of the corresponding interest rate index, leading to a longer amortisation profile. In addition, the interest component of the instalment that exceeds the instalment amount is not paid immediately, as the increase of the instalment amount is capped at the inflation rate.

Uplifts

The two-notch resolution uplift reflects that collateralised covered bonds in Italy are exempt from bail-in, that Fitch deems the risk of under-collateralisation at the point of resolution to be sufficiently low, and that a resolution of Mediobanca, should it happen, is not likely to result in the direct enforcement of recourse to the cover pool. It also takes into account that Mediobanca's Long-Term IDR is driven by its 'bbb' Viability Rating.

The six-notch PCU reflects the principal liquidity protection provided by a 12-month maturity extension, as well as a dynamic reserve that covers three months of senior expenses and interest payments.

The recovery uplift for the programme is two notches as the 'A+' timely payment rating level of the OBG is in the investment-grade category and Fitch has not identified any material downside risk to recoveries given default. All cover assets and covered bonds are euro-denominated.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The documented counterparty provisions limit the covered bonds' maximum achievable rating to 'AA', after factoring in two notches of recovery.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The covered bonds would be vulnerable to a downgrade if (i) Italy's 'AA' Country Ceiling was downgraded by at least one notch; (ii) the bank's Long-Term IDR was downgraded to 'B+' or below; or (iii) the AP that Fitch relies upon in its analysis increases above Fitch 'AA' break-even AP of 83.0%. The covered bonds would be downgraded by one notch if the AP relied upon increases to the 84.0% committed by the issuer.

Fitch's breakeven AP for the covered bonds' rating will be affected, among other factors, 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 bonds' rating cannot be assumed to remain stable over time.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The covered bonds' rating is linked to the IDR of the issuing entity.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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