UBI Banca Group

As required by the regulations, because it is a multioriginator programme, with cross-collateralisation
of the originator banks’ portfolios, the only valid test for investors is that performed on the whole
cover pool, while the tests performed on the individual portfolios are used to determine the integrity
of each originator’s portfolio for the purposes of cross-collateralisation between the different
originator banks.
In detail:
• the nominal value test verifies whether the nominal value of the loans in the transferred
portfolio is greater than the nominal value of the covered bonds issued. In order to ensure an
adequate degree of overcollateralisation in the portfolio, while the covered bonds are
considered at their nominal value, the loans in the portfolio are weighted on the basis of the
relative collateral backing them and the total amount is further reduced by an asset
percentage;
• the net present value test verifies whether the present value of the loans remaining in the
portfolio is greater than the present value of the covered bonds issued;
• the interest cover test verifies whether the interest received and held in accounts and the cash
flows from interest to be received net of the entity’s expense is greater than the interest to be
paid to the holders of the covered bonds;
• amortisation test (similar to the nominal value test, but only performed if UBI Banca is
downgraded by rating agencies);
• the top-up assets test verifies whether, before UBI Banca defaults, the total amount of
additional assets and liquidity is not 15% greater than the nominal value of the loans
remaining in the portfolio transferred, in compliance with the Ministry of the Economy and
Finance and Bank of Italy instructions.
If all the tests are passed simultaneously then the special purpose entity may proceed to pay all the
parties involved in the programme, including the originator banks as the lenders of the subordinated
loan, in the order indicated in the “payment chain”.
However, if the results of the tests are negative, then the contract states that the UBI Banca Group
must increase the collateral of the portfolio by transferring new mortgages to it and that is “topped
up” with extra assets. Failure to pass the tests, once the time limit allowed for the Group to add
assets has passed, results in an “issuer event of default” with a consequent enforcement of the
guarantee issued by UBI Finance. In this event the originator banks would only receive the
repayments of the subordinated loans granted after the redemption of the covered bonds by the
special purpose entity and within the limits of the remaining funds.
Organisational action and control procedures
As part of an organisational analysis process, four general processes were identified to which the
main activities of the programme were assigned. In detail:
1. identification of the liquidity requirements and approval of the operation by the competent
bodies. This general process involves assessment of proposals for the issue of covered
bonds by the Finance Committee of UBI Banca and approval of the basic outline by the
Management Board. Subsequently the network banks involved are informed, which assess
the proposals and their involvement in the issues on the basis of the information received.
In this context an “arranger” is identified who will supervise the operation and the internal
organisational units involved are also brought in;
2. planning and arrangement of the transaction. This general process involves verifying the
criteria for extracting and validating the assets which form part of the portfolio which is to
cover the issue. It interfaces with the rating agencies and external auditors and
preparatory work is done for proper segregation of the asset portfolio and for transfer to
the special purpose entity and all the relative contracts are prepared by internal units of
the bank and external advisors;
409