DBRS Ratings Limited (DBRS Morningstar) assigned ratings to the following classes of notes issued by Eridano II SPV S.r.l. (the Issuer):
-- Class A1 at A (sf)
-- Class A2-R at A (sf)
-- Class A3 at A (sf)
-- Class B at A (sf)
DBRS Morningstar does not rate the Class C notes issued in this transaction.
The ratings of the Class A1, A2-R, and A3 notes address the timely payment of interest and the ultimate repayment of principal by the legal maturity date in May 2035. The rating on the Class B notes addresses the ultimate payment of interest and ultimate repayment of principal by the legal maturity date while junior to other outstanding classes of notes, but the timely payment of interest when they are the senior-most tranche.
DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS Morningstar’s projected expected net losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the notes.
-- Legion CQ S.r.l.’s (Legion or the seller) and ViVi Banca S.p.A.’s (the originator and servicer) capabilities with respect to originations, underwriting, servicing, and their financial strength.
-- DBRS Morningstar’s operational risk review on ViVi Banca S.p.A.’s, which it deemed to be an acceptable servicer.
-- The appointment upon assignment of the rating of a backup servicer and subservicers and their capabilities with respect to servicing.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality, diversification of the collateral, and the historical and projected performance of the seller’s portfolio.
-- DBRS Morningstar’s sovereign rating of the Republic of Italy at BBB (high) with a Stable trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, the presence of legal opinions that address the true sale of the assets to the Issuer, and non-consolidation of the Issuer with the seller.
The transaction was initially set up on 23 November 2018 with the issuance and settlement of the notes. The assignment of the ratings follows certain amendments executed on or about the rating date.
The transaction represents the issuance of Class A1, A2-R, A3, B, and C partly paid notes currently backed by a portfolio of approximately EUR 241 million of fixed-rate receivables related to Italian salary- and pension- assignment loans as well as payment delegation loans. The loans were either initially granted by ViVi Banca S.p.A. or MCE Locam S.p.A. to employees and pensioners residing in Italy. MCE Locam S.p.A. granted and assigned the receivables to Legion, a special purpose vehicle, in the context of a securitisation transaction.
The Originator transferred or procured that Legion transferred, EUR 241 million of receivables to the Issuer and may transfer or procure that Legion transfer, additional receivables during a ramp-up period. The originator and Quinservizi S.p.A. (as subservicer of the Legion portfolio)will also service the portfolio.
The transaction includes a five-month ramp-up period during which time the originator may offer additional receivables that the Issuer will purchase provided that eligibility criteria and concentration limits set out in the transaction documents are satisfied. The purchase price of additional portfolios is funded with principal collections and further proceeds of subscription of the notes by the noteholders, in accordance with the target subordination levels defined in the transaction documents. The ramp-up period may end earlier than scheduled if certain events occur, such as the breach of performance triggers, insolvency of the originator, or replacement of the servicer.
The transaction allocates payments on a combined interest and principal priority and benefits from an amortising EUR 4.9 million cash reserve and an amortising EUR 1.2 million prepayment reserve funded by the originator on the issue date with part of proceeds of subscription of Class C notes. During the ramp-up period, the reserves are topped up by the Class C noteholder to the required respective amounts, corresponding to 2% of the Class A1, A2-R, A3, and B notes outstanding and 1.9% of the outstanding amount of the receivables. The cash reserve can be used to cover senior costs and interest on the Class A1, A2-R, A3, and B notes. The prepayment reserve can be used to offset risk of retention in relation to capitalised fees that may materialise upon prepayment of loans comprising capitalised costs.
The repayment of the notes starts on the June 2020 payment date on a sequential basis with Class A1, A2-R, and A3 notes paid in priority to Class B notes. The Class A1, A2-R, and A3 notes rank pro rata and pari passu and are senior to the Class B notes with respect to interest. However, the transaction structure includes an uncommon separate management of the receivables assigned by Legion in the Legion portfolio from the rest of the receivables in the residual portfolio. Although the target amortisation of the notes is driven by the amortisation of the aggregated portfolio sold by each seller so that the notes (on an aggregated basis) match the performing portfolio, the Legion portfolio is dedicated to the repayment of the Class A3 and A1 notes, and the residual portfolio is applied to repay the Class A1 and A2-R notes. The principal collections of the residual portfolio are equally divided into the Class A1 and A2-R; if either class is fully repaid, the related portion is allocated to the Class B notes. In a similar way, the Legion portfolio principal collections are allocated in predetermined proportions to the Class A1 and A3 notes; if either of class is fully repaid, the related portion is allocated to the Class B notes.
The mechanism may allow partial allocation of principal collections towards the repayment of the Class B notes while some of the Classes A notes are still outstanding. DBRS Morningstar analysed the transaction structure and the allocation to the various classes and deems the structure more complex than a usual sequential transaction. However, DBRS Morningstar considered its understanding of the mechanism and the application of the waterfall and conducted its cash flow analysis to treat the portfolio on aggregated basis. DBRS Morningstar deems the likelihood of payments to the junior classes compatible with its assigned ratings.
The notes pay interest indexed to one-month Euribor whereas the portfolio pays a fixed interest rate. The transaction is thus exposed to interest rate risk arising from the mismatch between the Issuer’s liabilities the portfolio. DBRS Morningstar addressed the risk assuming interest rate stresses in accordance with its methodologies.
DBRS Morningstar analysed the transaction cash flow structure in Intex DealMaker.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Rating European Consumer and Commercial Asset-Backed Securitisations.”
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. Due to the inclusion of a ramp-up period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.
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” methodology at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.
The data and information used for these ratings include performance and portfolio data relating to the receivables provided by the originator directly or through the arranger, Société Générale on the originator’s behalf.
DBRS Morningstar received static quarterly default and recovery data from Q3 2009 to Q2 2019 split by type of product, borrower/employer and event alongside origination and default volumes and early settlement data from Q3 2009 to Q2 2019 split by type of product and borrower/employer.
DBRS Morningstar was also provided with loan-by-loan portfolio information as at end of August 2019.
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 these ratings 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 rating 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 ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings:
-- Probability of default (PD) used: Expected PD of 18% for an A (sf) scenario, a 25% and 50% increase on the applicable PD.
-- Recovery rate used: Expected recovery rate of 61% for an A (sf) scenario.
-- Loss given default (LGD) used: Expected LGD of 39% for an A (sf) scenario, a 25% and 50% increase on the applicable LGD.
Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected default and a 25% increase on the expected LGD.
Scenario 5: A 50% increase in the expected default and a 25% increase on the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and a 50% increase on the expected LGD.
Scenario 8: A 50% increase in the expected default and a 50% increase on the expected LGD.
DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are
-- Class A1 Notes: A (sf), A (sf), A (sf), A (sf), A (sf), A (sf), A (sf), A (low) (sf).
-- Class A2-R Notes: A (sf), A (sf), A (sf), A (sf), A (sf), A (sf), A (sf), A (low) (sf).
-- Class A3 Notes: A (sf), A (sf), A (sf), A (sf), A (sf), A (sf), A (sf), A (low) (sf).
-- Class B Notes: A (sf), A (low) (sf), A (sf), A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf), A (low) (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: Paolo Conti, Senior Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 18 December 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: http://www.dbrs.com/about/methodologies.
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Interest Rate Stresses for European Structured Finance Transactions
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.