DBRS Ratings GmbH (DBRS Morningstar) assigned an A (sf) rating to the EUR 2,000,000,000 Series 2020-1-A Asset-Backed Partly Paid Floating Rate Notes due June 2060 (the Class A Notes) issued by Fanes S.r.l., under Series 2020-1 (the Issuer or Fanes).
The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in June 2060. The Issuer also issued EUR 1,000,000,000 Series 2020-1-J Asset-Backed Partly Paid Fixed Rate and Variable Return Notes due June 2060 (together with the Class A Notes, the Notes), which were not rated by DBRS Morningstar.
Fanes is a revolving cash flow securitisation collateralised by a portfolio of performing mortgage and unsecured loans to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. The loans were granted by Cassa di Risparmio di Bolzano S.p.A. (CR Bolzano or the Originator). A small portion of the portfolio was originated by Banca Sella and Kärntner Sparkasse, before some of their branches were acquired by CR Bolzano (in 2013 and 2012, respectively).
The initial valuation date when the economic effect of the portfolio transfer started was 30 April 2020. As of the initial valuation date, the portfolio consisted of 3,208 loans extended to 2,541 borrowers, with an aggregate par balance of EUR 737.82 million, of which EUR 1.93 million were in arrears for less than 30 days.
The transaction includes a 24-month ramp-up period, scheduled to end in June 2022 (included), during which time the Originator may sell new receivables (i.e., further portfolios) to the Issuer subject to certain conditions and limitations. The ramp-up period will end prematurely if certain events occur, including the cumulative gross default rate exceeding 10.0%, the inability to fully replenish the cash reserve, and the insolvency of the Originator. During the ramp-up period, the purchase of new receivables will be funded through principal and interest collections and from the payment of further instalments on the Notes. In fact, the Issuer issued the nominal amount of the Notes on the issue date (12 June 2020) on a partly paid basis (the initial instalment).
The transaction includes a cash reserve, which will be available to cover expenses, senior fees, and interest on the Class A Notes. The target cash reserve is equal to the greater of 2.0% of the principal outstanding of the Class A Notes and 1.29% of the collateral portfolio, with a floor at EUR 2.40 million. When further portfolios are transferred to the Issuer, the cash reserve will be increased by 1.29% of the collateral portfolio (considering further portfolios), reduced by the cash reserve already credited to the account.
The deal is structured with an implicit principal deficiency ledger mechanism whereby provisioning occurs when a loan is classified as defaulted (i.e., classified as “sofferenza” or in arrears for 180 days or more). However, if the ramp-up period terminates prematurely, the implicit under-collateralisation exceeds 5.0%, or the cumulative gross default ratio exceeds 10.0%, the transaction will start trapping all excess spread to amortise the Class A Notes.
The Class A Notes benefit from a total credit enhancement of 36.3%, which is provided by the overcollateralisation of the portfolio and the cash reserve. During the ramp-up period, when further instalments on the Notes are paid to fund the purchase price of additional portfolios and to increase the cash reserve, the minimum subordination provided by the junior notes is maintained at the initial level (i.e., 36.0%).
DBRS Morningstar based its analysis on the worst-case portfolio created in line with the purchase conditions and the common and specific criteria for further portfolio.
The initial portfolio consists of mortgage-backed loans representing 68.0% of the outstanding portfolio balance and senior unsecured loans representing the remaining 32.0%. The purchase conditions limit the portion of mortgage-backed loans in the portfolio to a minimum of 50.0% and a maximum of 70.0% at the end of the ramp-up period. DBRS Morningstar’s analysis was based on the maximum portion of unsecured loans in the portfolio, as it carries the highest loss expectations because of the lower associated recovery rates.
The initial portfolio exhibits a significant geographic concentration in the Italian region of Trentino Alto Adige, which accounts for 75.2% of the portfolio outstanding balance. The geographic concentration reflects the bank’s significant presence in the region. The portfolio is further concentrated in the regions of Veneto and Lombardy, accounting for 19.5% and 4.1%, respectively.
The initial portfolio exhibits a moderate sector concentration. The top three sector exposures, according to DBRS Morningstar’s industry classifications, are lodging & casinos, building & development, and farming/agriculture, which represent 26.9%, 23.2% and 14.8% of the outstanding portfolio balance, respectively. For the worst-case portfolio analysis, DBRS Morningstar assumed the largest industry to be 29.3%, in line with the replenishment conditions.
The initial portfolio has a moderate borrower concentration, as the largest and top five- and 10-largest borrower groups account for 2.0%, 6.5%, and 10.3% of the outstanding portfolio balance, respectively. The purchase conditions limit the exposure to the largest borrower to 2.0% and the top 20 borrowers to 17.0% of the portfolio; these limits were considered in the creation of the DBRS Morningstar worst-case portfolio.
CR Bolzano acts as the servicer and Securitisation Services S.p.A. acts as the backup servicer facilitator for this transaction. In the event the servicer’s appointment is terminated, the Issuer will appoint a substitute of the servicer with the help of the backup servicer facilitator within 45 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 an annualised PD of 4.3% and 2.8% for mortgage and unsecured loans, respectively. Additional adjustment were applied in the context of the current Coronavirus Disease (COVID-19) pandemic.
--The assumed weighted-average life (WAL) of the portfolio was 5.3 years.
-- The PDs and WAL were used in the DBRS Morningstar Diversity Model to generate the hurdle rate for the assigned rating.
-- The recovery rate was determined by considering the market value declines for Europe, the security level, and collateral type. Recovery rates of 63.0% and 16.2% were used for the secured and unsecured loans, respectively, at the A (sf) rating level.
-- The breakeven rates for the interest rate stresses and default timings were determined using DBRS Morningstar’s cash flow tool.
INFORMATION ON COVID-19
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 rating is 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 released 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/361867/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.
For more information on DBRS Morningstar considerations for European Structured Credit transactions and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar commentary: https://www.dbrsmorningstar.com/research/361098.
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: “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.
An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving 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 at: https://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 performance data relating to the receivables provided by the originator directly or through the arranger, FISG S.r.l.
DBRS Morningstar received the following data information:
-- Static quarterly default and recovery data from Q1 2005 to Q4 2019, split by mortgage and unsecured loans;
-- Dynamic quarterly default, delinquency, and prepayment data from Q1 2005 to Q4 2019, split by mortgage and unsecured loans;
-- Loan-level characteristics, stratification data, and contractual amortisation profile as at 30 April 2020.
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 issued 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.dbrsmorningstar.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 4.3% for mortgage loans and 2.8% for unsecured loans, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 33.1% at the A (sf) stress level, a 10% and 20% decrease in the base case recovery rate. 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 BBB (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 BBB (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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 12 June 2020
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
-- Rating CLOs Backed by Loans to European SMEs and DBRS Morningstar SME Diversity Model 2.4 (8 July 2019), https://www.dbrsmorningstar.com/research/347780/rating-clos-backed-by-loans-to-european-smes.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- 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.
-- Cash Flow Assumptions for Corporate Credit Securitizations (28 February 2020), https://www.dbrsmorningstar.com/research/357453/cash-flow-assumptions-for-corporate-credit-securitizations.
-- Rating CLOs and CDOs of Large Corporate Credit (28 February 2020), https://www.dbrsmorningstar.com/research/357452/rating-clos-and-cdos-of-large-corporate-credit.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (10 December 2019),
-- 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.
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.