DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) rating on the Class A Notes (the Notes) issued by Lanterna Finance S.r.l. (the Issuer).
The rating addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in October 2065.
The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the March 2020 payment date.
-- Portfolio default rates, recovery rates, and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the Notes to cover the expected losses at the AAA (sf) rating level.
The transaction is a cash flow securitisation carried out by the Banca Carige S.p.A. banking group and collateralised by a portfolio of bank loans to Italian small and medium-size enterprises.
The portfolio is performing within DBRS Morningstar’s initial expectations. As of the 31 March 2020, the outstanding portfolio balance was EUR 214.7 million. Loans that were 90+ days in arrears represented 7.8% of the outstanding portfolio balance. The cumulative default ratio decreased from last year because of the repurchase of some defaulted receivables and stood at 0.6%.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool and updated its default rate and recovery assumptions. The base-case probability of default (PD) has been updated to 8.4% following COVID-19 adjustments.
As of the 31 March 2020, credit enhancement to the Notes was 81.9%, an increase from 60.2% a year ago. Credit enhancement is provided by subordination of the Class B Notes and the cash reserve. The amortising cash reserve is available to cover shortfalls in relation to senior fees and the Notes’ interest.
BNP Paribas Securities Services SCA, Milan branch acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on BNP Paribas Securities Services SCA, Milan branch, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.
DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many SME transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.
On 16 April 2020, the DBRS Morningstar Sovereign group published its outlook on the impact to key economic indicators for the 2020-22 time frame. For details see the following commentaries: https://www.dbrsmorningstar.com/research/359679/global-macroeconomic-scenarios-implications-for-credit ratings and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.
For more information on DBRS Morningstar considerations for European Structured Credit transactions and Coronavirus Disease (COVID-19), please see the following commentary:
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is the “Rating CLOs Backed by Loans to European SMEs” (8 July 2019).
DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.
Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.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.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for this rating include information and reports provided by Banca Carige S.p.A. and loan-level data provided by the European DataWarehouse GmbH.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS Morningstar was not 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.
The last rating action on this transaction took place on 28 May 2019, when DBRS Morningstar confirmed its rating on the Notes at AAA (sf).
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at www.dbrsmorningstar.com.
To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):
-- PD Rates Used: Base-case PD of 8.4%, a 10% increase of the base case and a 20% increase of the base-case PD.
-- Recovery Rates Used: Base-case recovery rates of 50.0% at the AAA (sf) stress level for the Notes, a 10% and 20% decrease in the base-case recovery rates. 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 confirmation of the Notes at AAA (sf). A scenario combining both an increase in the base-case PD by 10% and a decrease in the base-case recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Notes at AAA (sf).
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Alfonso Candelas, Senior Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 2 December 2015
DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main – Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.
-- Rating CLOs Backed by Loans to European SMEs (8 July 2019) and SME Diversity Model v.2.4, https://www.dbrsmorningstar.com/research/347780/rating-clos-backed-by-loans-to-european-smes
-- Rating CLOs and CDOs of Large Corporate Credit (28 February 2020)
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
-- Master European Structured Finance Surveillance Methodology (22 April 2020)
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (10 December 2019) https://www.dbrsmorningstar.com/research/354403/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda
-- Interest Rate Stresses for Structured Finance Transactions (10 October 2019)
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at http://www.dbrsmorningstar.com/research/278375.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.
This press release was amended on 3 June 2020 to correct a mention of the legal entity name from DBRS Morningstar Ratings GmbH to DBRS Ratings GmbH.