DBRS Ratings GmbH (DBRS Morningstar) assigned AAA (sf) ratings to the Class A1 Asset-Backed Floating-Rate Notes due April 2057 and Class A2 Asset-Backed Floating-Rate Notes due April 2057 (together, the Class A Notes) issued by Credico Finance 18 S.r.l. (the issuer or CF18).
The rating of the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date in April 2057. The issuer also issued Class J Asset-Backed Floating Rate Notes due April 2057 (together with the Class A Notes, the Notes), which DBRS Morningstar does not rate.
CF18 is a cash flow securitisation collateralised by a portfolio of performing mortgage and nonmortgage loans to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. The loans were granted by 14 independent local cooperative banks (each a Banca Credito Cooperativo, BCC) that belong to the network of ICCREA Group (collectively, the originators).
The economic effect of the portfolio transfer from the originator to the issuer took place on 8 November 2019 (the effective date). As of the effective date,, the portfolio consisted of 3,916 loans extended to 3,565 borrower groups, with an aggregate par balance of EUR 519,422,620, of which EUR 366,083 were in arrears for less than 15 days.
The transaction includes a cash reserve, which will be funded on the issue date through a limited recourse loan provided by the originators and it will be available to cover senior fees and interest on the Class A Notes, as well as principal payments on the Class A Notes up to a floor of 3.5% of the Class A Notes initial outstanding balance. The cash reserve has a target level of 4% of the initial outstanding balance of the Class A Notes.
The deal is structured with a single waterfall for the payment of interest and principal on the Notes. While the Class A1 and A2 Notes receive interest on a pro rata basis, the payment of the Class A1 and A2 target principal amortisation amount is sequential.
The Class A Notes benefit from a total credit enhancement of 46.4% that is provided by subordination of the junior notes (Class J Notes) and the cash reserve.
The initial portfolio consists of senior unsecured loans representing 32.4% of the outstanding portfolio balance and mortgage-backed loans representing the remaining 67.6%. However, DBRS Morningstar analysis considers only 47.4% as mortgage secured. Loans that benefit from second or lower liens but for which no prior charges information was provided were considered as unsecured.
The initial portfolio exhibits a moderate geographic concentration in the Italian regions of Emilia-Romagna and Piedmont, which accounts for 26.0% and 23.6% of the portfolio outstanding balance, respectively. The portfolio is further concentrated in the regions of Veneto and Marche, accounting for 13.9% and 11.2%, respectively.
The initial portfolio exhibits a moderate sector concentration. The top three sector exposures, according to DBRS Morningstar’s industry classifications, are Farming & Agriculture, Building & Development and Business Equipment & Services, which represent 23.3%, 12.5% and 6.3% of the outstanding portfolio balance, respectively. The initial portfolio has a comparably low borrower concentration, as the largest and the top five- and ten- borrower groups account for 0.7%, 2.3% and 3.6% of the outstanding portfolio balance, respectively.
Each originator acts as a servicer and Zenith S.p.A. acts as the backup servicer for this transaction. If the servicer’s appointment is terminated, the backup servicer will commence substitute services within 45 calendar days.
DBRS Morningstar determined its rating based on the principal methodology and the following analytical considerations:
-- The probability of default (PD) for the portfolio was determined using the historical performance information supplied. DBRS Morningstar assumed a PD of 3.0% for unsecured loans and a PD of 5.5% for secured loans.
--The assumed weighted-average life (WAL) of the portfolio was 4.9 years.
-- The PDs and WAL were used in the DBRS Morningstar SME Diversity Model to generate the hurdle rate for the assigned ratings.
-- DBRS Morningstar determined the recovery rate by considering the market value declines for Europe, the security level and collateral type. DBRS Morningstar used recovery rates of 43.3% and 13.5% for the secured and unsecured loans, respectively, at the AAA (sf) rating level.
-- DBRS Morningstar determined the break-even rates for the interest rate stresses and default timings using its cash flow tool.
DBRS Morningstar analysed the transaction structured in its proprietary cash flow tool, considering the default rates at which the rated notes did not return all specified cash flows.
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 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. The analysis is based on the worst-case criteria set forth in the transaction legal documents (loan renegotiations).
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 these ratings include the originators and the operating bank, ICCREA Banca S.p.A.
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.
These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings 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):
-- PD rates used: Base case PD of 3.0% for unsecured loans and a PD of 5.5% for secured loans, a 10% and 20% increase on the base case PD.
-- Recovery rates used: Base case recovery rates of 43.3% and 13.5% for the secured and unsecured loans, respectively, a 10% and 20% decrease in the base case recovery rate, respectively. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.
DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would lead to a downgrade of the Class A Notes to AA (high) (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 GmbH are subject to EU and US regulations only.
Lead Analyst: Stephan Rompf, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 5 December 2019
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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 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.