DBRS Ratings GmbH (DBRS Morningstar) assigned an A (high) (sf) rating to the EUR 205,000,000 Class A1 Asset-Backed Notes due January 2060 (the Class A1 Notes) and a BBB (high) (sf) rating to the EUR 20,000,000 Class A2 Asset-Backed Notes due January 2060 issued by Lanterna Finance S.r.l. (2020) (the Issuer or Lanterna Finance 3).
The ratings on the Class A1 and Class A2 Notes address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in January 2060. The Issuer also issued EUR 137,500,000 Class B Asset-Backed Notes due January 2060 (together with the Class A1 and Class A2 Notes, the Notes), which were not rated by DBRS Morningstar.
Lanterna Finance 3 is a cash flow securitisation collateralised by a portfolio of performing mortgage and nonmortgage loans to Italian micro companies and small and medium-size enterprises (SMEs). The loans were granted by Banca Carige S.p.A. (Carige) and Banca del Monte di Lucca S.p.A. (BML, and together with Carige, the Originators), the latter being part of the Carige group since 2000.
The initial valuation date when the economic effect of the portfolio transfer started was 2 June 2020. As of the initial valuation date, the portfolio consisted of 6,484 loans extended to 5,533 borrowers, with an aggregate par balance of EUR 357.46 million, of which EUR 34.68 million of loans were in arrears for less than 90 days. The initial portfolio consists of senior unsecured loans representing 68.3% of the outstanding portfolio balance and mortgage-backed loans representing the remaining 31.7%.
In a pre-enforcement scenario, the structure allows for interest on the Class A1 Notes to be paid in priority to the interest on the Class A2 Notes. Principal on the Class A1 Notes is subordinated to the payment of interest on the Class A2 Notes, but in priority to the payment of principal. Considering that the non-timely payment of interest on both the Class A1 and Class A2 Notes is defined as event of default in the transaction documentation, the non-timely payment of interest on the Class A2 Notes might drive the event of default of the Class A1 Notes. DBRS Morningstar has considered such feature into its analysis. In a post-enforcement scenario, the Class A1 and Class A2 Notes are pari passu and pro rata with respect to both principal and interest payments.
The transaction includes a cash reserve, which will be available to cover expenses, senior fees, and interest on the Class A1 and Class A2 Notes. The target cash reserve is equal to 2.0% of the principal outstanding of the Class A1 and Class A2 Notes (without any floor).
The Class A1 and Class A2 Notes benefit from a total credit enhancement of 43.8% and 38.2%, respectively, which is provided by the overcollateralisation of the portfolio and the cash reserve.
The initial portfolio exhibits a higher geographic concentration in the Italian region of Liguria, which accounts for 36.1% 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 Tuscany and Lombardy, accounting for 15.1% and 11.0%, respectively.
The initial portfolio exhibits a moderate sector concentration. The top three sector exposures, according to DBRS Morningstar’s industry classifications, are building & development, business equipment & services, and food products, which represent 28.0%, 9.5%, and 6.8% of the outstanding portfolio balance, respectively. The initial portfolio has a moderate borrower concentration, as the largest and top five and 10 largest borrower groups account for 1.5%, 6.1%, and 10.3% of the outstanding portfolio balance, respectively.
The initial portfolio includes loans under payment holidays of the full installment (39.3% of the portfolio) or of the principal component only (4.5%), the majority of which ends in June and September 2020.
Carige and BML act as the master servicer and additional servicer, respectively, and Zenith Service S.p.A. acts as the backup servicer for this transaction. In case of one of the servicer’s appointment termination, the Issuer will appoint a substitute of the servicer within 15 days.
DBRS Morningstar determined its ratings 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 6.7% and 6.9% for mortgage and nonmortgage 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 4.0 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 55.7% and 15.6% were used for the secured and unsecured loans, respectively, at the A (high) (sf) rating level. Recovery rates of 62.1% and 16.3% were used for the secured and unsecured loans, respectively, at the BBB (high) (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. For this transaction, DBRS Morningstar increased the expected default rate for obligors in certain industries based on their perceived exposure to the adverse disruptions 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.
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 performance data relating to the receivables provided by the Originators directly or through the arranger, Banca IMI S.p.A.
DBRS Morningstar received the following data information, split by mortgage and unsecured loans:
-- Static annual default and recovery data from 2005 to 2019;
-- Dynamic semiannual delinquency data from Q4 2005 to Q2 2019;
-- Dynamic semiannual default and prepayment data from Q2 2008 to Q4 2019.
In addition, DBRS Morningstar received loan-level characteristics and contractual amortisation profile as at 2 June 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 6.7% for mortgage loans and 6.9% for non-mortgage loans, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 28.3% and 30.8% at the A (high) (sf) and BBB (high) (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%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to BBB (high) (sf), whereas a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A1 Notes at A (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 A1 Notes to BBB (high) (sf).
DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to BBB (sf), whereas a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A2 Notes at 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 A2 Notes to BBB (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 U.S. regulations only.
Lead Analyst: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 30 June 2020
DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
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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 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: http://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.