DBRS Ratings GmbH (DBRS Morningstar) confirmed its A (high) (sf) rating on the Class A Series 2 notes (the Class A Notes) issued by Valconca SPV S.r.l. (the Issuer).
The rating addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date.
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 April 2020 payment date.
-- Base case probability of default (PD) and updated recovery rates on the remaining receivables.
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the A (high) (sf) rating level.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) outbreak.
Valconca SPV S.r.l. (SME) is a cash flow securitisation collateralised by a portfolio of term loans originated by Banca Popolare Valconca S.p.A. (BPV) to Italian small and medium-size enterprises (SMEs) and self-employed individuals. BPV services the collateral portfolio, with Securitisation Services S.p.A. appointed as backup servicer facilitator. The transaction closed in July 2018, when the special-purpose vehicle issued one senior class of floating-rate notes and one junior class of variable-return notes, namely the Class A Series 2 notes and the Class J Series 2 notes.
The portfolio is performing within DBRS Morningstar’s initial expectations. As of the March 2020 cut-off, loans that were two to three months in arrears represented 0.7% of the outstanding portfolio balance, up from 0.1% as of the March 2019 cut-off, while the 90+ delinquency ratio was 3.2%, also up from 1.4% as of the March 2019 cut-off. The cumulative gross default ratio stood at 0.9% of the initial portfolio balance, up from 0.3% last year.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its default and recovery assumptions on the outstanding portfolio to 63.6% and 46.3%, respectively, at the A (high) (sf) rating level. The base case PD has been updated to 7.5%, following adjustments related to the coronavirus pandemic.
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the Class A Notes, and includes the cash reserve. As of the April 2020 payment date, credit enhancement to the Class A Notes was 41.9%, up from 34.9% as of the April 2019 payment date.
The transaction structure also benefits from an amortising cash reserve, which provides liquidity support and is available to cover senior fees and interest payments on the Class A Notes. As of the April 2020 payment date, the reserve was at its target level of EUR 2.0 million, which accounts for 2.0% of the Class A Notes outstanding balance.
BNP Paribas Securities Services, Milan branch acts as the account bank for the transaction. Based on the private rating of BNP Paribas Securities Services, Milan branch, the downgrade provisions outlined in the transaction documents, and structural mitigants 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 CLO 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. 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. In addition, DBRS Morningstar conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolio. Reported payment holidays were also considered in the asset analysis.
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/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.
On 18 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated Structured Credit transactions in Europe. For more details please see https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.
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 investor reports provided by Securitisation Services S.p.A., servicer reports provided by BPV 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 12 July 2019, when DBRS Morningstar upgraded the rating on the Class A Notes to A (high) (sf) from A (sf).
The lead analyst responsibilities for this transaction have been transferred to Daniele Canestrari.
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):
-- 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.
-- PD Rates Used: Base case PD of 7.5%, a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: Base case recovery rate of 46.3% at the A (high) (sf) rating level, 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%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf), whereas 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:
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Daniele Canestrari, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 25 July 2018
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.
-- 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),
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019),
-- Rating CLOs and CDOs of Large Corporate Credit (28 February 2020),
-- Rating CLOs Backed by Loans to European SMEs and SME Diversity Model v18.104.22.168 (8 July 2019), https://www.dbrsmorningstar.com/research/347780/rating-clos-backed-by-loans-to-european-smes
-- Cash Flow Assumptions for Corporate Credit Securitizations (28 February 2020),
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.