DBRS Morningstar Assigns Rating to Florence SPV S.r.l. (2020)

DBRS Ratings GmbH (DBRS Morningstar) assigned an AA (low) (sf) rating to the Class A Asset Backed Partly Paid Fixed Rate Notes (the Class A Notes) issued by Florence SPV S.r.l. (2020) (the Issuer).

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in October 2042. The Issuer also issued the Class B Asset Backed Partly Paid Fixed Rate Notes due October 2042 (together with the Class A Notes, the Notes), which were not rated by DBRS Morningstar.

The Issuer is a revolving cash flow securitisation collateralised by a portfolio of performing receivables related to personal loan contracts granted to Italian individuals by Findomestic Banca S.p.A. (the Originator or Findomestic).

The total initial portfolio will be transferred in two stages. On 1 October 2020, Findomestic transferred the first initial portfolio consisting of 208,876 loans extended to 203,839 borrowers with a total outstanding balance of EUR 3.0 billion. The second initial portfolio will be transferred on or around 3 November 2020 and will consist of additional loans with a maximum total outstanding balance of EUR 3.63 billion.

Similarly, the Issuer issued the nominal amount of the Notes on the issue date (29 October 2020) on a partly paid basis, the initial instalment, to fund the acquisition of the first initial portfolio. On or around 23 November 2020 (the settlement date), the proceeds from the incremental instalment on the Notes will fund the purchase of the second initial portfolio. The proceeds from the initial instalment on the Notes total EUR 2.22 billion paid on the Class A Notes and EUR 779.91 million paid on the Class B Notes.

The transaction includes a 24-month revolving period, during which time the Originator may sell new receivables (i.e., subsequent portfolios) to the Issuer subject to certain conditions and limitations. The revolving period will end prematurely if certain events occur, including the cumulative gross default rate exceeding dynamic limits, the inability to fully replenish the liquidity reserve, and the insolvency of the Originator. During the revolving period, the purchase of new receivables will be funded through principal collections.

The deal is structured with a principal deficiency ledger mechanism whereby provisioning occurs when a loan is classified as defaulted.

The transaction includes a liquidity reserve, which will be available to cover expenses, senior fees, interest on the Class A Notes (only if principal collections are not sufficient to cover the interest deficiency), and a cash reserve, of which the excess amount will be available to cover principal payments on the Class A Notes.

The Class A Notes benefit from a total credit enhancement of 27.6%, which is provided by the overcollateralisation of the portfolio and the cash reserve. On the settlement date, when the incremental instalment on the Notes is paid to fund the purchase price of second initial portfolio, the minimum subordination provided by the junior notes as well as the credit enhancement on the Class A Notes are maintained at the initial level (i.e., 26.0% and 27.6%, respectively).

DBRS Morningstar determined its rating based on its “Rating European Consumer and Commercial Asset-Backed Securitisations” methodology and the following considerations:
-- The transaction’s capital structure and the form and sufficiency of available credit enhancement in the form of subordination, reserve funds, and excess spread.
-- The ability of the transaction’s structure and triggers to withstand stressed cash flow assumptions in order to timely or ultimately pay interest, as the case may be, and ultimately repay the principal under the notes before the final legal maturity date according to the terms of the transaction documents.
-- Findomestic’s financial strength and its capabilities with respect to originations, underwriting, and servicing.
-- An updated operational risk review of Findomestic, which DBRS Morningstar conducted in September 2020; DBRS Morningstar deemed it to be an acceptable originator and servicer.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality, diversification of the collateral and historical and projected performance of the seller’s portfolio.
-- The credit quality of the collateral and ability of the servicer to perform collection activities on the collateral.
-- The sovereign rating of the Republic of Italy, currently rated BBB (high) with a Negative trend by DBRS Morningstar.
-- The consistency of the legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker, considering the default rates at which the Class A Notes did not return all specified cash flows.

INFORMATION ON COVID-19
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 ABS transactions, some meaningfully. The rating is based on additional analysis 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 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-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.

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.

For more information on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar commentary: https://www.dbrsmorningstar.com/research/360734.

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 rating is: “Rating European Consumer and Commercial Asset-Backed Securitisations” (3 September 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 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 this rating include performance data relating to the receivables provided by the originator directly or through the arranger, BNP Paribas S.A.

DBRS Morningstar received the following data information, split by origination channel (direct and agents):
-- Monthly dynamic arrears data from January 2010 to April 2020,
-- Monthly dynamic prepayment data from January 2010 to April 2020,
-- Quarterly static default data from Q1 2010 to Q2 2020,
-- Quarterly static recovery data from Q1 2011 to Q2 2020,
-- Quarterly static prepayment data from Q1 2010 to Q2 2020.

In addition, DBRS Morningstar received loan-level characteristics, stratification data, and contractual amortisation profile as at 1 October 2020.

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 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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):

-- Probability of default (PD) used: Expected PD of 37.2% for a AA (low) (sf) scenario, a 25% and 50% increase on the applicable PD.
-- Recovery rate used: Expected recovery rate of 15.1% for a AA (low) (sf) scenario.
-- Loss given default (LGD) used: Expected LGD of 84.9% for a AA (low) (sf), a 25% and 50% increase on the applicable LGD.

Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected default and a 25% increase on the expected LGD.
Scenario 5: A 50% increase in the expected default and a 25% increase on the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and a 50% increase on the expected LGD.
Scenario 8: A 50% increase in the expected default and a 50% increase on the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are:
-- Class A Notes: A (sf), BBB (high) (sf), A (sf), BBB (high) (sf), BBB (sf), A (sf), BBB (high) (sf), BBB (sf).

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 29 October 2020

DBRS Ratings GmbH
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (21 July 2020), https://www.dbrsmorningstar.com/research/364305/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020), https://www.dbrsmorningstar.com/research/367603/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.

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.