DBRS Ratings GmbH (DBRS Morningstar) downgraded the rating on the Class A Notes issued by UBI SPV Group 2016 S.r.l. (the Issuer) to BBB (high) (sf) from A (low) (sf), following an amendment to the transaction. The Under Review with Negative Implication (UR-Neg.) status on the Class A Notes was removed.
The rating addresses the timely payment of interest and ultimate payment of principal by the legal final maturity date in October 2070.
The downgrade follows an entire review of the transaction and is based on the following analytical considerations:
-- An amendment to the transaction documents executed on 29 May 2020 (the Amendment);
-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the July 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 BBB (high) (sf) rating level;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic;
-- No revolving termination events occurred so far.
DBRS Morningstar placed the rating on the Class A Notes UR-Neg. on 24 June 2020. For information on this rating action, please refer to this press release: https://www.dbrsmorningstar.com/research/362940/dbrs-morningstar-places-56-ratings-of-17-european-rmbs-transactions-under-review-with-negative-implications
UBI SPV Group 2016 S.r.l. is a securitisation of Italian first-lien residential mortgage loans originated by Unione di Banche Italiane S.p.A. (UBI Banca) and several other Italian local banks incorporated into UBI Banca in November 2016 and February 2017. UBI Banca took the role of master servicer at transaction closing and replaced the acquired banks in their subservicing activities, following the incorporations. The transaction closed in August 2016, when the special purpose vehicle issued one senior class of floating-rate notes (i.e., the Class A Notes) and seven junior classes of additional return notes (i.e., the Class B 1-7 Notes). The Class B 1-7 Notes were incorporated as the Class B Notes from the October 2017 payment date.
The transaction includes a revolving period lasting until August 2022, during which UBI Banca may sell subsequent portfolios to the Issuer, subject to certain conditions and limitations. All eligibility criteria, concentration limits, and performance triggers in place to mitigate a potential portfolio deterioration during the revolving period are being met to date.
The following amendments were executed and are effective from 29 May 2020.
There was a change in the renegotiation limits set forth by the servicing agreement, in order to (1) increase the quantitative limit on contractual principal payment suspensions and (2) exclude payment suspensions granted as a result of the pandemic or other catastrophic events (also, for example, in accordance with Italian primary law or banking association agreements, such as ABI – the Italian Banking Association) from the computation of the limits set out by the servicing agreement.
Under the new amendments, changes in certain individual eligibility criteria during the revolving period will allow the transfer of the following:
-- Subsidised mortgage loans;
-- Mortgage loans paying interest-only instalments;
-- Mortgage loans secured by personal guarantees (Garanzie Omnibus); and
-- Mortgage loans currently benefitting from a payment suspension, up to 18 months.
Additionally, there are changes in certain transfer limits to be applied to the outstanding pool during the revolving period. The most relevant changes for DBRS Morningstar’s rating analysis include:
-- An increase in the maximum percentage of loans whose debtor is an employee of the UBI Banca group;
-- A different current loan-to-value (CLTV) distribution, with a lower share in the higher CLTV buckets;
-- A decrease in the minimum weighted-average interest rate for fixed-rate loans to 1.75% from 2.75%;
-- A decrease in the minimum weighted-average spread for floating-rate loans to 1.0% from 1.4%; and
-- An increase in the maximum set-off ratio to 1.0% from 0.5%.
As of the May 2020 cut-off date, loans that were two- to three-months in arrears represented 0.2% of the outstanding portfolio balance, stable from the November 2019 cut-off, to which the last rating action for this transaction references. The 90+ delinquency ratio was 1.5%, slightly down from 1.7% as of the November 2019 cut-off. The gross cumulative default ratio stood at 2.0% of the initial portfolio balance (including additional portfolios). As of the July 2020 payment date, all concentration limits and performance triggers in place were satisfied.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and, given that the transaction is still within its revolving period, its base case PD and LGD assumptions at 19.2% and 36.6%, respectively, continue to be based on a worst-case portfolio composition as per the replenishment criteria set forth in the transaction legal documents.
Furthermore, key drivers for this rating action are (1) the combined negative effect of the more severe spread and interest rate compression as well as the increased set-off ratio considered in the cash flow analysis, as per the new transfer limits introduced by the Amendment, coupled with (2) additional adjustments applied as a result of the negative economic environment caused by the coronavirus pandemic.
Overcollateralisation of the outstanding collateral portfolio and the cash collateral set aside and not used to purchase subsequent portfolios provide credit enhancement. As of the July 2020 payment date, credit enhancement to the Class A Notes was 25.2%, stable from last the January 2020 payment date, at the time of the latest DBRS Morningstar annual review for this transaction.
The transaction benefits from an amortising cash reserve, which is available to cover shortfalls on senior fees, expenses, and interest payments on the Class A Notes. The reserve is currently at its target level of EUR 130.4 million, or 6.25% of the Class A Notes initial balance, and will start amortising after the end of the revolving period, subject to certain conditions, with a target amount of 6.25% of the Class A Notes outstanding balance (the floor is set at EUR 65.2 million).
UBI Banca acts as the account bank for the transaction. Based on the DBRS Morningstar’s Long-Term Critical Obligation Rating currently assigned to UBI Banca, 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 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 RMBS transactions, some meaningfully. The rating is based on additional analysis and adjustments to the expected performance as a result of the global efforts to contain the spread of the COVID-19.
For this transaction, DBRS Morningstar increased the expected default rate for self-employed borrowers and assumed a moderate decline in residential property prices. In addition, DBRS Morningstar conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand potential payment holidays in the portfolio.
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 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated RMBS transactions in Europe. For more details please see https://www.dbrsmorningstar.com/research/360599/european-rmbs-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 methodologies applicable to the ratings are the “Master European Structured Finance Surveillance Methodology” (22 April 2020) and the “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” (10 December 2019).
DBRS Morningstar has applied the principal methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.
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.
DBRS Morningstar conducted a review of the amended transaction documents including the Master Definitions Agreement, the Master Servicing Agreement, the Terms and Conditions of the Notes and the Master Transfer Agreement. A review of any other transaction’s legal documents was not conducted as the these 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:
The sources of data and information used for this rating include investor, servicer, payment reports, and additional information provided by UBI Banca as well as loan-level data provided by the European DataWarehouse GmbH.
DBRS Morningstar did not rely upon third-party due diligence 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 24 June 2020 when DBRS Morningstar placed the rating of the Class A Notes UR-Neg. Prior to that, on 28 January 2020, DBRS Morningstar confirmed the rating on the Class A Notes at A (low) (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):
-- 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 19.2% and 36.6%, 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 fall to BB (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected fall to BB (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to BB (low) (sf).
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (low) (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: 11 August 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.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
-- Master European Structured Finance Surveillance Methodology (22 April 2020)
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (10 December 2019) and European RMBS Credit Model 184.108.40.206
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020)
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020)
-- Interest Rate Stresses for European 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.