DBRS Ratings Limited (DBRS) assigned ratings to the EUR 681,378,000 Class A1 Asset Backed Floating Rate Notes due May 2059 (the Class A1 Notes) and the EUR 66,361,000 Class A2 Asset Backed Floating Rate Notes due May 2059 (the Class A2 Notes) issued by 2019 Popolare Bari SME S.r.l. (the Issuer or 2019 Popolare Bari SME) as follows:
-- Class A1 Notes at AA (sf)
-- Class A2 Notes at A (sf)
The rating on the Class A1 Notes addresses the timely payment of interest and ultimate repayment of principal on or before the final maturity date in May 2059. The rating on the Class A2 Notes addresses the ultimate payment of interest and repayment of principal on or before the final maturity date. The Issuer also issued EUR 396,272,000 Class J1 Asset Backed Floating Rate and Additional Return Notes due May 2059 and EUR 57,819,000 Class J2 Asset Backed Floating Rate and Additional Return Notes due May 2059, which were not rated by DBRS.
2019 Popolare Bari SME is a cash flow securitisation collateralised by a portfolio of performing loans to small and medium-sized enterprises (SME), entrepreneurs, artisans and producer families based in Italy. The loans were granted by Banca Popolare di Bari S.C.p.A. (BPB) and Cassa di Risparmio di Orvieto S.p.A. (CRO and, together with BPB, the Originators). The portfolio also contains loans originated by Banca Tercas S.p.A. and Banca Caripe S.p.A., prior to their merger into BPB in July 2016.
In a pre-enforcement scenario, the structure allows for interest and principal on the Class A1 Notes to be paid in priority to the Class A2 Notes. In a post-enforcement scenario, the Class A1 and Class A2 Notes are pari passu and pro rata with respect to both principal and interest payments.
The securitisation is a restructuring of an existing transaction. On 29 April 2019, the Originators entered into the original transaction under which the initial portfolio of SME loans was purchased by the Issuer with the proceeds from the issuance of the original notes, which occurred on 8 May 2019. The proceeds from the original notes were also used to fund the liquidity reserve at the target level of EUR 5.5 million. The original notes had previously not been rated by DBRS.
On 1 August 2019, the Originators entered into additional agreements under which an additional portfolio totalling EUR 224.8 million was purchased by the Issuer. In the context of the restructuring, the Originators repurchased part of the initial portfolio for the total amount of EUR 629.0 million on 18 July 2019.
On the issue date, the aggregate proceeds of the notes’ issuance were used to fully redeem the original notes and purchase the additional portfolio. Available principal collections on the initial portfolio since the last payment date and proceeds resulting from the repurchase are used.
The economic effect of the transfer of the additional portfolio from the Originators to the Issuer took place on 25 July 2019 (the Effective Date). As of the Effective Date, the total portfolio (i.e., the initial portfolio and the additional portfolio) consisted of 7,135 loans extended to 5,513 borrowers, with an aggregate par balance of EUR 1.19 billion, of which EUR 0.5 million was in arrears by less than 30 days.
The transaction includes a liquidity reserve of EUR 16.8 million, which is available to cover senior fees and interest on the Class A1 Notes. The liquidity reserve will not amortise during the life of the transaction and will be maintained at a level equal to 2.25% of the Class A1 and Class A2 Notes original balance.
The Class A1 Notes benefit from a total credit enhancement (CE) of 43.9%, which is provided by the overcollateralisation of the portfolio and the liquidity reserve. The Class A2 Notes benefit from a CE of 36.9% only provided by the overcollateralisation of the portfolio.
The transferred portfolio, totalling EUR 1.19 billion, consists of senior unsecured loans representing 34.5% of the outstanding portfolio balance and mortgage-backed loans representing 65.5%. Historical performance data indicates that mortgage-backed loans have a higher historical probability of default (PD) than unsecured loans. This behaviour is in line with other SME loan originators. The higher PD for mortgage loans is compensated by higher recoveries expectations compared with unsecured loans.
The geographical concentration of the portfolio is relatively granular and mainly concentrated in the Italian regions of Abruzzo (25.0% of the portfolio outstanding balance), Apulia (23.4%) and Lazio (12.3%). This geographical concentration reflects the bank’s significant presence in these regions.
The portfolio exhibits a moderate sector concentration. The top three sector exposures, according to DBRS’s industry classifications, are Building & Development, Lodging & Casinos and Farming & Agriculture, which represent 36.3%, 7.2% and 6.2% of the outstanding portfolio balance, respectively. The portfolio has a significant borrower concentration, as the largest borrower accounts for 3.2% of the outstanding portfolio balance and the largest five and ten borrower groups account for 10.6% and 15.9%, respectively.
BPB acts as the master servicer, whereas BPB and CRO act as the servicers for their respective portfolios. Zenith Services S.p.A. acts as the backup servicer for this transaction. The backup servicer will step in within 45 business days if either the master servicer or any of the two servicers’ appointment have been terminated. To account for the warm backup servicer arrangements, DBRS has factored a commingling loss in its cash flow analysis, in line with other Italian SME collateralised loan obligation (CLO) transactions.
DBRS continues to monitor BPB due to the magnitude of losses sustained in 2018 and recent changes to the senior management team including the resignation of the President in July 2019 and the appointment of a new General Manager and CEO, which needs time to season. DBRS notes that further significant write downs could materially and adversely affect BPB’s financial condition and/or its ability to continue to service. DBRS believes that this risk is mitigated by the presence of the backup servicer, Zenith Services S.p.A., which has been active in the market since 1999. It conducts master servicing, backup servicing, backup servicer facilitating, primary servicing, calculation agent and corporate servicing for 90 clients with a master servicing portfolio of approximately EUR 27.6 billion as of year-end 2018. In addition to this, the bank also has an existing relationship with Cerved, an experienced Italian servicer, which currently services approximately 75% of BPBs non-performing loans (NPLs) and 55% of its unlikely-to-perform loans (UTPs), which DBRS believes that there would be continuity of servicing in a default event.
The ratings are based on DBRS’s “Rating CLOs Backed by Loans to European SMEs” methodology and the following analytical considerations:
-- The PD for the portfolio was determined using the historical performance information supplied. DBRS assumed an annualised PD of 7.8% and 5.4% for mortgage and non-mortgage loans originated by BPB, respectively, and an annualised PD of 6.8% and 3.2% for mortgage and non-mortgage loans originated by CRO, respectively.
--The assumed weighted-average life (WAL) of the portfolio was 5.8 years.
-- The PDs and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the assigned ratings.
-- The recovery rate was determined by considering the market value declines for Italy, the security level and collateral type. Recovery rates of 47.7% and 15.8% were used for the secured and unsecured loans, respectively, at the AA (sf) rating level; 52.8% and 16.3%, respectively, at the A (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 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.
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 these ratings include Banca Popolare di Bari S.C.p.A. and indirectly, the arranger, NatWest Markets Plc.
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 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.
These ratings concern a newly issued financial instrument. These are the first DBRS ratings 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 7.8% and 6.8% for mortgage loans and 5.4% and 3.2% for non-mortgage loans of BPB and CRO, respectively, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 27.8% at the AA (sf) rating level, and of 31.1% at the A (sf), a 10% and 20% 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%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to A (high) (sf), and a downgrade of the Class A2 Notes to BBB (high) (sf), respectively. A hypothetical decrease of the base case recovery Rate by 20%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to A (high) (sf), and a downgrade of the Class A2 Notes to BBB (high) (sf), respectively. 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 downgrade of Class A1 Notes to A (high) (sf), and a downgrade of the Class A2 Notes to BBB (high) (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 Limited are subject to EU and US regulations only.
Lead Analyst: Carlos Silva, Senior Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 8 August 2019
DBRS Ratings Limited
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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.