DBRS Ratings GmbH (DBRS) upgraded two and confirmed three classes of notes (the Notes) issued by Quadrivio SME 2018 S.r.l. (the Issuer) as follows:
-- Class A2 Notes confirmed at AAA (sf)
-- Class A3 Notes confirmed at AAA (sf)
-- Class B Notes confirmed at AA (high) (sf)
-- Class C1 Notes upgraded to BBB (high) (sf) from BB (high) (sf)
-- Class C2 Notes upgraded to BBB (high) (sf) from BB (high) (sf)
Additionally, DBRS discontinued its AAA (sf) rating on the Class A1 Notes, following its full repayment on 22 July 2019. Prior to the payment in full, the Class A1 Notes outstanding balance was EUR 31.4 million.
The ratings on the Class A2 and Class A3 Notes (together, the Class A Notes) address the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date. The ratings on the Class B Notes and Class C1 and Class C2 Notes (together, the Class C Notes) address the ultimate payment of interest and principal on or before the Final Maturity Date, in accordance with the transaction documentation.
The rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults and losses as of the July 2019 payment date.
-- Base case probability of default (PD), and updated default and recovery rates on the remaining receivables.
-- Current available credit enhancement (CE) to the Notes to cover the expected losses at their respective rating levels.
Quadrivio SME 2018 is a cash flow securitisation established in July 2018 and collateralised by a portfolio of loans to small and medium-sized enterprises (SME), entrepreneurs, artisans and producer families based in Italy. The loans were granted by Credito Valtellinese S.p.A. (Credito Valtellinese, also the servicer) and Credito Siciliano S.p.A. before being merged into Credito Valtellinese in June 2018.
The transaction’s performance has been stable since closing. As of July 2019, loans that were two to three months in arrears represented 0.5% of the outstanding portfolio balance. The 90+ delinquency ratio was 0.3% and the cumulative gross default ratio stood at 1.5% of the original portfolio balance.
DBRS conducted a loan-by-loan analysis on the remaining pool of receivables and maintained its annualised PD of 6.8% and 2.9% for mortgage and non-mortgage loans, respectively. The assumed updated weighted-average life (WAL) of the portfolio was 3.8 years. The PDs and WAL were used in DBRS’s Diversity Model to generate updated hurdle rates for the different rating levels.
The Class A Notes benefit from a total CE of 50.8%, compared with 37.8% at closing. This is provided by subordination of the Class B, Class C and Class J Notes and the cash reserve. The Class B and the Class C Notes benefit from CE of 41.3% and 23.6%, versus 30.8% and 17.7% one year ago, respectively. The increased CE prompted the upgrade of the Class C Notes.
The transaction includes a cash reserve, which is available to cover senior fees and interest on the Class A and Class B Notes. The cash reserve will amortise subject to the target level being equal to 1% of the outstanding balance of the Class A and Class B Notes. As of the July payment date, the cash reserve was at its required amount of EUR 7.3 million.
Citibank N.A., Milan branch acts as the Account Bank for the transaction. Based on the private rating of the Account Bank, the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS considers the risk arising from the exposure to the Account Bank to be consistent with the rating assigned to the Class A Notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.
The transaction structure was analysed in DBRS’s proprietary excel-based cash flow engine.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is “Rating CLOs Backed by Loans to European SMEs”.
DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.
Other methodologies referenced in this transaction are listed at the end of this press release. These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/333487/rating-sovereign-governments.pdf.
The sources of data and information used for these ratings include investor reports provided by Securitisation Services S.p.A., servicer reports provided by Credito Valtellinese and loan-level data provided by the European DataWarehouse GmbH.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
This is the first rating action since the Initial Rating Date.
The lead analyst responsibilities for this transaction have been transferred to Alfonso Candelas.
Information regarding DBRS ratings, including definitions, policies and methodologies is available at www.dbrs.com.
To assess the impact of changing the transaction parameters on the ratings, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):
-- PD Rates Used: Base case PD of 6.8% for mortgage loans and 2.9% for non-mortgage loans, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 34.6% at the AAA (sf), 40.0% at the AA (high) (sf) and 46.9% at the BBB (high) (sf) stress levels, a 10% and 20% decrease in the base case recovery rate.
For the Class A Notes, DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Class A Notes at AAA (sf), a confirmation of the Class B Notes at AA (high) (sf) and a downgrade of the Class C Notes to BBB (sf), respectively. A hypothetical decrease of the base case recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A Notes at AAA (sf), a confirmation of the Class B Notes at AA (high) (sf) and a confirmation of the Class C Notes at BBB (high) (sf), respectively. Finally, a scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10% would lead to a confirmation of the Class A Notes at AAA (sf), a confirmation of the Class B Notes at AA (high) (sf), and a downgrade of the Class C Notes to BBB (sf), respectively.
For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings GmbH are subject to EU and US regulations only.
Lead Analyst: Alfonso Candelas, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 30 July 2018
DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- Rating CLOs Backed by Loans to European SMEs
-- Master European Structured Finance Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Interest Rate Stresses for European Structured Finance Transactions
-- Rating CLOs and CDOs of Large Corporate Credit
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Operational Risk Assessment for European Structured Finance Servicers
A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at firstname.lastname@example.org.