DBRS Morningstar Assigns Ratings to Lanterna Mortgage S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned the following ratings to the Class A1 and Class A2 Residential Mortgage-Backed Floating Rate Notes issued by Lanterna Morgage S.r.l. (the Issuer):

-- EUR 173,891,000 Class A1 Notes at AA (sf)
-- EUR 11,179,000 Class A2 Notes at AA (low) (sf)

The ratings assigned to the Class A1 and A2 Notes address the timely payment of interest and the ultimate payment of principal on or before the final maturity date in January 2065. DBRS Morningstar does not rate the EUR 69,034,000 Class J Notes (ISIN IT0005418014) issued in this transaction.

The purchase of the portfolio was funded through the issuance of Class A1, Class A2, and Class J Notes while the EUR 4,626,750 cash reserve was fully funded through the issuance of the Class J Notes. The cash reserve is equal to 2.5% of the initial balance of the Class A1 and A2 Notes.

At closing, the Class A1 Notes benefitted from 30% credit enhancement (calculated as a percentage of the portfolio) while the Class A2 Notes benefitted from 25.5% credit enhancement. Credit enhancement is also available through the cash reserve to the extent that released amounts of the cash reserve (on the payment date when both Class A1 and A2 Notes are fully redeemed) are part of the available funds.

The portfolio consists of Italian residential mortgage loans originated by Banca Carige S.p.A. (Carige) and Banca del Monte di Lucca S.p.A. (BML), which are also the servicers of their respective subpools. Carige also acts as the master servicer of the transaction, while Zenith Service S.p.A. has been appointed as the backup servicer.

As of 12 July 2020, the portfolio consisted of 2,322 mortgage loans granted to 2,318 borrowers. At that time, the total balance of the portfolio was EUR 248 million and the average loan balance was EUR 106,983. The weighted-average (WA) seasoning of the portfolio was 4.0 years with a WA residual maturity of 23.8 years. The WA loan-to-value of the portfolio was 90.9%. The portfolio is mainly concentrated in Lombardy (32.7% of the pool balance) and Liguria (22.2%).

Most of the pool (79% of the pool balance) benefits from an Italian state guarantee, subsidised through a specific fund (First Home Fund (Fondo Prima Casa)), aimed at facilitating the purchase of the first property by households. This first-demand guarantee, released through the state agency CONSAP S.p.A., covers 50% of the loan outstanding principal (at default).

In its credit analysis, DBRS Morningstar did not give full credit to the guarantee for rating scenarios above BBB (high) (sf), in line with the current long-term issuer rating of the Italian sovereign. Moreover, DBRS Morningstar assumed that in all rating scenarios a portion of the guarantee would not be honoured to account for possible rescissions of the guarantee due to the mortgage noncompliance with the terms.

The portfolio is split between 23.7% floating- and 76.3% fixed-rate loans. A small portion of the floating-rate loans (0.9% of the total pool) include an interest rate cap. The majority of floating-rate loans (55.4% of the floating-rate pool) are indexed to three-month Euribor.

The transaction account bank is The Bank Of New York Mellon SA/NV, Milan branch. Based on the account bank’s rating and the replacement provisions included in the transaction documents, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

The ratings are based on DBRS Morningstar’s review of the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement and liquidity provisions.
-- The portfolio characteristics. The European RMBS Credit Model was used to estimate the expected probability of default (PD), loss given default (LGD), and expected loss of the portfolio.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the terms and conditions of the Notes.
-- The incorporation of a sovereign-related stress component in the stress scenarios as a result of DBRS Morningstar’s BBB (high) rating assigned to the Republic of Italy.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

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 structured finance 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.

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 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the ratings of DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see https://www.dbrsmorningstar.com/research/360599.

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.

ESG CONSIDERATIONS
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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” (14 July 2020).

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: 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 information used for these ratings include historical performance data on defaults (from 2005 to 2019), recoveries (from 2005 to 2019), delinquencies (from 2008 to 2019) and prepayments (from 2008 to 2019), and loan-level data on the pool (as at 12 July 2020) provided by the originators.

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 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.

These ratings concern newly rated financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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):

In respect of the Class A1 Notes, the PD and LGD at the AA (sf) stress scenario of 50.11% and 36.57%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS Morningstar assesses the following impact on the Class A1 Notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to BBB (sf)
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to BB (high) (sf)
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (low) (sf)
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to AA (low) (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf)
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf)

DBRS Morningstar assesses the following impact on the Class A2 Notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to BBB (sf)
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to BB (high) (sf)
-- 25% increase of the LGD, ceteris paribus would not lead to a rating change;
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf)
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (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 US regulations only.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 31 July 2020

DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
28006 Madrid
Spain
Tel. +34 (91) 903 6500

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.

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 July 2020) and European RMBS Credit Model v 1.0.0.0,
https://www.dbrsmorningstar.com/research/363998/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda

-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.

-- 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.

-- 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.

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 info@dbrsmorningstar.com.