DBRS Ratings GmbH (DBRS Morningstar) placed its rating on the Class A Notes issued by Indigo Lease S.r.l. (the Issuer) Under Review with Negative Implications.
The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in July 2029.
The rating action 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 May 2020 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AA (sf) rating level;
-- No revolving termination events have occurred;
-- Current economic environment and sustainable performance assessment, as a result of the Coronavirus Disease (COVID-19) outbreak.
The Issuer is a securitisation of lease receivables related to financial lease contracts to corporations, small businesses, and individuals with registered offices in Italy, granted by Banca IFIS S.p.A. (Banca IFIS) and IFIS Leasing S.p.A. (formerly GE Capital Servizi Finanziari S.p.A.), which was merged into Banca IFIS in May 2018. Banca IFIS services the portfolio, with Securitisation Services S.p.A. acting as the backup servicer. The transaction introduced a two-year revolving period during the July 2017 restructuring which was further extended by an additional two years during the restructuring in June 2019 and is expected to end in July 2021. During the revolving period, the Issuer is allowed to replenish the repaid receivables subject to the eligibility requirements specified in the transaction documentation. To date, all of them have been met.
As of the May 2020 payment date, leases zero to one month and one to two months in arrears represented 6.6% and 2.2% of the outstanding portfolio balance, respectively, while loans two to three months in arrears represented 0.6%. Gross cumulative defaults amounted to 1.7% of the aggregate initial collateral balance, with cumulative recoveries of 67.8% to date.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has maintained its base case PD and LGD assumptions at 9.4% and 79.8%, respectively, based on the worst case portfolio composition as allowed by the replenishment criteria.
In May 2020, DBRS Morningstar released its commentaries “European ABS Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” (https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect) and “European Structured Credit Transactions” Risk Exposure to Coronavirus (COVID-19) Effect” (https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect), where DBRS Morningstar discussed the overall risk exposure of the ABS and SME sectors to the coronavirus and provided a framework for identifying the transactions that are more at risk and likely to be affected by the fallout of the pandemic on the economy. Considering the framework, the Under Review with Negative Implications status on the Class A Notes is driven by the collateral performance of the portfolio to date and the exposure towards SME borrowers, as well as DBRS Morningstar’s consideration that unemployment levels contemplated in the moderate scenario of the DBRS Morningstar updated commentary published on 1 June 2020 (https://www.dbrsmorningstar.com/research/359679/global-macroeconomic-scenarios-implications-for-credit-ratings) could result in higher delinquencies, ultimately higher defaults and lower recoveries. The rating on the Class A Notes could be negatively affected by higher expected defaults and/or lower recovery assumptions.
DBRS Morningstar typically endeavours to resolve the status of ratings Under Review with Negative Implications as soon as appropriate and within a 90-day timeframe. If heightened market uncertainty and volatility persists, DBRS Morningstar may extend the Under Review status for a longer period of time.
The subordination of the Class B Notes provides credit enhancement to the Class A Notes. As of the May 2020 payment date, credit enhancement to the Class A Notes was 31.0%, unchanged since the DBRS Morningstar initial rating due because of the inclusion of the revolving period scheduled to end in July 2021.
The transaction benefits from a cash reserve, which will only start amortising once the Class A Notes have paid down by half. The reserve has a target balance equal to 3% of the Class A Notes principal outstanding, and would be available to cover senior fees and expenses, and interest payments on the Class A Notes. As of the May 2020 payment date, the reserve was at its target of EUR 5.7 million.
BNP Paribas Securities Services, Milan Branch acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of BNP Paribas Securities Services, 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 Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.
DBRS Morningstar analysed the transaction structure in Intex DealMaker.
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 ABS 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.
The DBRS Morningstar Sovereign group released on 16 April 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were updated on 1 June 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/361868/dbrs-morningstar-global-macroeconomic-scenarios-june-update 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 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 ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
DBRS Morningstar is undertaking a review and will remove the rating from this status as soon as it is appropriate.
An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.
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 portfolio and performance data provided by FISG S.r.l., investor reports provided by Securitisation Services 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 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 6 June 2019, when DBRS Morningstar confirmed its rating of on the Class A Notes at AA (sf), following a transaction restructuring.
The lead analyst responsibilities for this transaction have been transferred to Petter Wettestad.
Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies is available on 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):
-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of loans for the Issuer are 9.4% and 79.8%, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to decrease to A (high) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class A Notes would be expected to decrease to A (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to decrease to BBB (high) (sf).
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
The rating is Under Review with the Negative Implications designation. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. If continued heightened market uncertainty and volatility persists, DBRS Morningstar may extend the Under Review status for a longer period of time.
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: Petter Wettestad, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 15 December 2016
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.
-- Master European Structured Finance Surveillance Methodology (22 April 2020),
-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020), https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (28 February 2020),
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
--Rating CLOs and CDOs of Large Corporate Credit (28 February 2020),
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
-- 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.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/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.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.