DBRS Ratings GmbH (DBRS) assigned an A (high) (sf) rating to the EUR 142.9 million Class A Asset Backed Notes due July 2045 (the Class A Notes) issued by Magnolia BTV S.r.l. (the Issuer or Magnolia BTV).
The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date in July 2045. The Issuer also issued EUR 47.5 million Class J Asset Backed Notes due July 2045 (the Class J Notes), which were not rated by DBRS.
Magnolia BTV is a cash flow securitisation collateralised by a portfolio of performing mortgage and non-mortgage loans to Italian small and medium-sized enterprises (SMEs), entrepreneurs, artisans and producer families. The loans were granted by Banco delle Tre Venezie S.p.a. (Banco delle Tre Venezie or the Originator). As of 30 June 2019, the transaction’s transferred portfolio included 507 loans to 400 obligor groups, totalling EUR 187.6 million. The economic effect of the transfer of the portfolio from the Originator to the Issuer took place on 30 June 2019 (the Effective Date).
The portfolio exhibits a high borrower group concentration; the largest three borrower groups each respectively represented 2.2%, 1.7% and 1.7% of the portfolio notional amount as at the Effective Date. Moreover, the top ten borrower groups represented 15.2% of the outstanding portfolio notional amount while the top 30 borrower groups comprised 34.3% as at the Effective Date.
The final pool exhibits relatively high exposure to the “Building & Development” industry, representing 36.1% of the outstanding balance. The “Business Equipment and Services” (11.6%) and “Farming/Agriculture” (10.6%) sectors have the second- and third-largest exposures based on DBRS’s industry classifications.
The geographic composition of the portfolio consists of loans granted to borrowers in northern Italy. The portfolio is mainly concentrated in the region of Veneto, which represents 94.02% of the outstanding portfolio balance. The regions of Lombardy and Friuli-Venezia Giulia are the second- and third-largest represented regions, respectively comprising 2.7% and 1.3% of the portfolio. All other regions represented less than 0.7% of the portfolio as at the Effective Date. Overall, the portfolio regional concentrations reflect the distribution of the Originator’s branches across Italy.
Based on the data from the Valuation Date, 70.1% of the portfolio by loan balance is secured but a relevant percentage of loans have second or subsequent liens with no information regarding the previous charges. Consequently, DBRS considered 59.0% of the portfolio balance to be secured.
The Class A Notes benefit from 25.0% subordination of the Class J Notes. The Class J Notes were issued to fund part of the portfolio purchase and the cash reserve of the transaction, which is available to cover senior fees and interest on the Class A Notes. The cash reserve will amortise subject to the target level being equal to 2.0% of the outstanding balance of the Class A Notes, up to a floor of 0.5% of the initial balance of the Class A Notes. The Class J Notes interest and principal payments are subordinated to the Class A Notes.
The Class A Notes pay interest quarterly equal to three-month Euribor plus a margin of 0.5%. The interest payable on the Class A Notes is also floored at zero and capped at 3.0%, which was reflected in DBRS’s cash flow analysis. DBRS also factored an adjustment to account for basis and repricing risks given that the transaction has no interest rate hedging mechanism in place. The notes and the floating loans in the portfolio are indexed to three-month Euribor but reset periods and reset dates are different. Consequently, the transaction is exposed to some interest rate risk. Based on the interest rate distribution of the portfolio, DBRS assumed a stressed basis of 28 basis points per annum, reducing the spread of floating loans from day one.
The transaction also lacks structural features to mitigate the set-off risk. DBRS assumed a loss of the total initial set-off risk, equal to 6.5% of the portfolio balance as at the Valuation Date. This was accounted for in DBRS’s cash flow analysis.
In this transaction, Banco delle Tre Venezie acts as the servicer and Securitisation Services S.p.A. acts as the backup servicer facilitator. The backup servicer facilitator supports the Issuer in appointing a substitute servicer in case the servicer’s appointment is terminated. To account for the lack of any backup servicer arrangement, DBRS has factored a commingling loss into its cash flow analysis, in line with other Italian SME collateralised loan obligation (CLO) transactions.
The rating is based on DBRS’s “Rating CLOs Backed by Loans to European SMEs” methodology and the following analytical considerations:
-- The probability of default rate (PD) for the portfolio was determined using the historical performance information supplied. DBRS assumed an annualised PD of 3.9% and 3.4% for mortgage and non-mortgage loans, respectively.
--The assumed weighted-average life (WAL) of the portfolio was 4.1 years.
-- The PDs and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the assigned rating.
-- The recovery rate was determined by considering the market value declines for Europe, the security level and collateral type. Recovery rates of 69.3% and 16.3% were used for the secured and unsecured loans, respectively, at the A (high) (sf) rating level.
-- The break-even rates for the interest rate stresses and default timings were determined using DBRS’s cash flow tool.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating 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.
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: https://www.dbrs.com/research/333487/rating-sovereign-governments.
The sources of data and information used for this rating include the originator, Banco delle Tre Venezie and the arranger, FISG S.r.l.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
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 this rating 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 rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
-- PD Used: Base case PD of 3.9% for mortgage loans and 3.4% for non-mortgage loans, a 10.0% and 20.0% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 49.9% at the A (high) (sf) stress level, a 10.0% and 20.0% decrease in the base case recovery rate. Note that the percentage decreases in the recovery rate are assumed for the other stress recovery rate levels.
DBRS concludes that a hypothetical increase of the base case PD by 20.0%, ceteris paribus, would not have impact on the rating and it would remain at A (high) (sf). A hypothetical decrease of the base case recovery rate by 20.0% would lead to a downgrade of the Class A Notes to A (low) (sf). Finally, a scenario combining both an increase in the base case PD by 10.0% and a decrease in the base case recovery rate by 10.0% would lead to a downgrade of Class A Notes to A (sf).
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, Sucursal en España are subject to EU and US regulations only.
Lead Analyst: María López, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 31 July 2019
DBRS Ratings GmbH, Sucursal en España
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Geschäftsführer: Detlef Scholz
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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
-- 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
-- Operational Risk Assessment for European Structured Finance Originators
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 email@example.com.