DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on five classes of notes (the notes) issued by Quadrivio SME 2018 S.r.l. (the Issuer) as follows:
-- Class A2 Notes at AAA (sf)
-- Class A3 Notes at AAA (sf)
-- Class B Notes at AA (high) (sf)
-- Class C1 Notes at BBB (high) (sf)
-- Class C2 Notes at BBB (high) (sf)
The ratings on the Class A2 and Class A3 notes (together, the Class A Notes) address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date. The ratings on the Class B Notes, and the Class C1 and Class C2 notes (together, the Class C Notes) address the ultimate payment of interest and principal on or before the legal final maturity date, in accordance with the transaction documentation.
The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the July 2020 payment date.
-- Base case probability of default (PD) and default and recovery rates on the receivables.
-- The current available credit enhancement to the notes to cover the expected losses at their respective rating levels.
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.
Quadrivio SME 2018 is a cash flow securitisation established in July 2018 and collateralised by a portfolio of loans to small and medium-size enterprises (SME), entrepreneurs, artisans, and producer families based in Italy. The loans were granted by Credito Valtellinese S.p.A. (Credito Valtellinese, also the servicer) and Credito Siciliano S.p.A. before being merged into Credito Valtellinese in June 2018.
The transaction’s performance has been stable since closing. As of July 2020, loans that were two to three months in arrears represented 0.7% of the outstanding portfolio balance, up from 0.5% in July 2019. The 90+ delinquency ratio was 0.5% (vs 0.3% at the time of the last annual review) and the cumulative gross default ratio stood at 2.5% of the original portfolio balance, up from 1.5% in July 2019.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool of receivables and updated its default rate and recovery rate assumptions on the outstanding portfolio to 23.8% and 55.5%, respectively, at the B (sf) rating level. The base case PD has been updated to 8.6% following coronavirus-related adjustments. The assumed updated weighted-average life (WAL) of the portfolio was 4.1 years.
The Class A Notes benefit from a total credit enhancement of 69.0%, compared with 50.8% as of the last annual review. This is provided by subordination of the Class B, Class C, and Class J Notes and the cash reserve. The Class B and the Class C notes benefit from credit enhancement of 56.2% and 32.5%, versus 41.3% and 23.6% one year ago, respectively.
The transaction includes a cash reserve, which is available to cover senior fees and interest on the Class A and Class B notes. The cash reserve will amortise subject to the target level being equal to 1% of the outstanding balance of the Class A and Class B notes. As of the July 2020 payment date, the cash reserve was at its required amount of EUR 6.0 million.
Citibank N.A., Milan branch acts as the account bank for the transaction. Based on the private rating of the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants, 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 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 payment holidays and delinquencies may arise in the coming months for many SME 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. Additionally, 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.
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 last updated on 22 July 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-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 ratings 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.
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: 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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for these ratings include investor reports provided by Securitisation Services S.p.A., servicer reports provided by Credito Valtellinese, and loan-by-loan data from 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 ratings, 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 these ratings 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 30 July 2019, when DBRS Morningstar confirmed the ratings on the Class A2 Notes and A3 Notes at AAA (sf), confirmed the rating on the Class B Notes at AA (high) (sf), and upgraded the ratings on the Class C1 and Class C2 notes to BBB (high) (sf) from BB (high) (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 ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (the Base Case):
-- PD Rates Used: Base case PD of 6.8% for mortgage loans and 2.9% for nonmortgage loans, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rates of 35.2% at the AAA (sf), 40.9% at the AA (high) (sf), and 48.6% at the BBB (high) (sf) stress levels, a 10% and 20% decrease in the base case recovery rate.
For the Class A Notes, DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Class A Notes at AAA (sf), a confirmation of the Class B Notes at AA (high) (sf), and a confirmation of the Class C Notes at BBB (high) (sf). A hypothetical decrease of the base case recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A Notes at AAA (sf), a confirmation of the Class B Notes at AA (high) (sf), and a confirmation of the Class C Notes at BBB (high) (sf). Finally, a scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10% would lead to a confirmation of the Class A Notes at AAA (sf), a confirmation of the Class B Notes at AA (high) (sf), and a confirmation of the Class C Notes at 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: Alfonso Candelas, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 30 July 2018
DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main – Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
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 (8 July 2019) and SME Diversity Model v.188.8.131.52
-- Rating CLOs and CDOs of Large Corporate Credit (21 July 2020)
-- Master European Structured Finance Surveillance Methodology (22 April 2020)
-- Cash Flow Assumptions for Corporate Credit Securitizations (21 July 2020)
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019)
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020)
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 July 2020)
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 email@example.com.