DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the notes issued by 2019 Popolare Bari SME S.r.l. (the Issuer) as follows:
-- Class A1 Notes at AA (sf)
-- Class A2 Notes at A (sf)
The rating on the Class A1 Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2059. The rating on the Class A2 Notes addresses the ultimate payment of interest and the ultimate payment of principal on or before the legal final maturity date.
The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the May 2020 payment date;
-- Base case probability of default (PD) and updated recovery rates on the remaining receivables;
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective rating levels;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.
2019 Popolare Bari SME is a cash flow securitisation 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 Banca Popolare di Bari S.C.p.A. (BPB) and Cassa di Risparmio di Orvieto S.p.A. (CRO and, together with BPB, the Originators). The portfolio also contains loans originated by Banca Tercas S.p.A. and Banca Caripe S.p.A., prior to their merger into BPB in July 2016.
In August 2019, the special-purpose vehicle issued two classes of floating-rate notes, namely the Class A1 and Class A2 notes (together, the Class A Notes), and two junior classes of floating-rate and additional-return notes, namely the Class J1 and Class J2 notes, respectively.
In a pre-enforcement scenario, the structure allows for interest and principal on the Class A1 Notes to be paid in priority to the Class A2 Notes. 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.
On 25 June and 26 June, BPB signed agreements to repurchase loans classified as “in sofferenza” and unlikely-to-pay, respectively, from the special-purpose vehicle. The purchase price for loans classified as “in sofferenza” was EUR 0.96 million (90% of the outstanding principal balance at the moment of classification), while for unlikely-to-pay loans was EUR 135.5 million (outstanding principal balance plus accrued interest plus unpaid instalments). As of the date of this press release, the funds have already been paid to the special-purpose vehicle and will be processed on the next payment date (31 August 2020), through the regular priority of payments.
BPB (the Servicer) services the portfolio, with Zenith Service S.p.A. appointed as the backup servicer. The Bank of Italy placed BPB under special administration on 13 December 2019, which would constitute a servicer termination event according to the transaction documents. As of the date of this press release, no waiver of such breach has been signed by the transaction parties. Nevertheless, the Servicer continues to service the portfolio with no disruption observed so far. DBRS Morningstar believes that the transaction benefits from features that are considered to adequately mitigate risks arising from a potential servicing disruption, but continues to closely monitor the situation.
On 29 June 2020, BPB’s shareholders approved a plan to transform the Italian cooperative bank into a joint stock company and raise fresh capital. The capital increase would be jointly subscribed by state-owned Banca del Mezzogiorno-Mediocredito Centrale (MCC) and by the Fondo Interbancario di Tutela dei Depositi (FITD), which is the depositor protection fund backed by Italian banks.
As of the April 2020 cut-off, loans that were two to three months in arrears represented 2.4% of the outstanding portfolio balance, while the 90+ delinquency ratio was 2.7%. The cumulative gross default ratio stood at 0.1% of the initial portfolio balance.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool and updated its portfolio default rate and recovery assumptions on the outstanding portfolio to 64.6% and 28.7%, respectively, at the AA (sf) rating level, and 58.9% and 31.1%, respectively, at the A (sf) rating level.
The base case PDs for mortgage and non-mortgage loans have been maintained as follows:
-- annualised PD of 7.8% and 5.4% for mortgage and nonmortgage loans originated by BPB, respectively.
-- annualised PD of 6.8% and 3.2% for mortgage and non-mortgage loans originated by CRO, respectively.
Following coronavirus-related adjustments, the weighted average base case PD has been updated to 8.8%.
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the Class A Notes and, in the case of the Class A1 Notes, includes the liquidity reserve. As of the May 2020 payment date, credit enhancements to the Class A1 and Class A2 notes were 51.5% and 43.6%, respectively, up from 43.9% and 36.9%, respectively, at transaction closing.
The transaction structure benefits from a nonamortising liquidity reserve, which is available to cover senior fees and interest payments on the Class A1 Notes. As of the May 2020 payment date, the reserve was at its target level of EUR 16.8 million, which accounts for 2.25% of the Class A Notes initial 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 linked to COVID-19. 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. As of 24 July 2020, around EUR 528.4 million in terms of portfolio outstanding principal benefitted from a COVID-19 related payment moratorium.
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 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: 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 and additional information provided by BPB, 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 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.
This is the first rating action on this transaction since the initial rating date in August 2019.
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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (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 7.8% and 5.4% for mortgage and nonmortgage loans originated by BPB, respectively; base case PD of 6.8% and 3.2% for mortgage and nonmortgage loans originated by CRO, respectively; a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: Base case recovery rate of 28.7% at the AA (sf) rating level, and 31.1% at the A (sf) rating level, a 10% and 20% decrease in the base case recovery rate. Note that the percentage decreases in the recovery rate 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 confirmation of the Class A1 Notes at AA (sf), and to a downgrade of the Class A2 Notes to A (low) (sf). A hypothetical decrease of the base case recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A1 Notes at AA (sf), and to a downgrade of the Class A2 Notes to A (low) (sf). 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 Class A1 Notes at AA (sf), and to a downgrade of the Class A2 Notes to A (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: 8 August 2019
DBRS Ratings GmbH
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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.
-- 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 (14 July 2020)
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019)
-- Rating CLOs and CDOs of Large Corporate Credit (21 July 2020)
-- Rating CLOs Backed by Loans to European SMEs (8 July 2019) and SME Diversity Model v.184.108.40.206, https://www.dbrsmorningstar.com/research/347780/rating-clos-backed-by-loans-to-european-smes.
-- Cash Flow Assumptions for Corporate Credit Securitizations (21 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 firstname.lastname@example.org.