DBRS Ratings Limited (DBRS Morningstar) assigned a rating of A (high) (sf) to the EUR 6.65 billion Class A notes issued by Brera SEC2 S.r.l. (the Issuer).
The rating addresses timely payment of interest and the Issuer’s obligation to repay principal on the Class A notes. DBRS Morningstar does not rate the EUR 859,500,000 Class B notes.
The purchase of the initial portfolio was funded through the issuance of the Class A notes and the Class B notes, with the cash reserve fully funded at EUR 133,000,000 (2.0% of the initial Class A amount) via a subordinated loan granted by Intesa Sanpaolo SpA (ISP: rated BBB (high) with a Stable trend by DBRS Morningstar). The Class A notes benefit from 11.4% subordination from the Class B notes, plus a 2.0% enhancement provided by the cash reserve. The cash reserve provides liquidity support to cover senior fees and any Class A interest shortfall or principal at the final maturity date in December 2072, if necessary.
The initial portfolio consists of Italian residential mortgage loans originated by ISP, which also acts as the servicer and seller of this transaction.
As of 23 September 2019, the closing portfolio had a total balance of EUR 7.5 billion and consisted of 67,411 mortgage loans extended to 65,899 borrowers. The average loan per borrower was EUR 113,954. The weighted-average (WA) seasoning of the portfolio was 1.1 years with a WA remaining maturity of 23.1 years. The WA current loan-to-value of the portfolio was 65.2%.
The pool is geographically distributed across Italy, with 51.7% of the portfolio located in the wealthy Northern region, 30.8% in Central Italy and 17.5% in the South of Italy. The top three regions are Lombardy (19.9%), Tuscany (15.8%) and Emilia-Romagna (10.4%).
The portfolio consists mostly of fixed-rate-for-life loans, which represent 88.7% of the pool in terms of outstanding balance. Floating-rate loans represent 10.1% of the outstanding balance. The remaining 1.2% of the portfolio consists of optional loans where borrowers have the option to switch from fixed interest rates to floating rates and vice versa at certain dates throughout the life of the loan. No swaps are in place to hedge the basis and fixed to floating and basis interest rate risks; however, the 2.15% cap on the coupon of Class A notes partially mitigates the risk.
The Transaction Account Bank provider is ISP. DBRS Morningstar rates ISP Senior Long-Term debt at BBB (high), and ISP Critical Obligations at “A”. The transaction documents contain downgrade provisions that are commensurate with a rating on the securities of up to A (high), according to DBRS Morningstar’s “Legal Criteria for European Structured Finance Transaction” methodology.
The rating is based upon review by DBRS Morningstar of the following analytical considerations:
-- The transaction’s capital structure, including the form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the static mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS Morningstar used the European RMBS Credit Tool to estimate probability of default (PD), loss given default (LGD) and expected loss (EL) outputs on the mortgage loan portfolio to analyse with DBRS Morningstar’s cash flow tool.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language for the Account Bank in the transaction documents.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the terms and conditions of the notes.
-- The incorporation of a sovereign-related stress component in the stress scenarios as a result of the BBB (high) rating assigned by DBRS Morningstar to the Republic of Italy.
-- The consistency of the legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and presence of legal opinions addressing the assignment of the assets to the Issuer.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda.”
DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology. An asset and a cash flow analysis were both conducted.
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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for this rating include ISP and Banca IMI.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.
This rating concerns a newly rated financial instrument. This is the first DBRS Morningstar rating on this financial instrument.
Information regarding DBRS Morningstar 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 Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
In respect of the Class A notes, the PD and LGD at the A (high) (sf) stress scenario of 24.4% and 32.0%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.
DBRS Morningstar concludes the following impact on the Class A notes:
-- 25% increase of the PD, ceteris paribus would not lead to a downgrade of Class A notes rating.
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- 25% increase of the LGD, ceteris paribus would not lead to a downgrade of Class A notes rating.
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).
For further information on DBRS Morningstar 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: Alessandra Maggiora, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 27 November 2019
DBRS Ratings Limited
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Registered in England and Wales: No. 7139960
The rating methodologies used in the analysis of this transaction can be found at:
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Interest Rate Stresses for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
A description of how DBRS Morningstar 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.