DBRS Morningstar Confirms Ratings on Credico Finance 18 S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) ratings on the Class A1 and Class A2 Notes (together, the Class A Notes) issued by Credico Finance 18 S.r.l. (the Issuer).

The ratings address the timely payment of interest and the ultimate payment of principal by the 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 October 2020 payment date.
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables.
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) rating level.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Credico Finance 18 S.r.l. (CF18) is a multi-originator securitisation backed by a portfolio of secured and unsecured loans granted by 14 Italian cooperative and independent banks (BCC, or Banca di Credito Cooperativo) to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. All the BCCs belong to the ICCREA Banca S.p.A. (ICCREA) network. ICCREA is the operating bank in the transaction and is the entity responsible for supporting the activities of the BCCs in terms of payment services, funding techniques, and regulatory and administrating activities. Each BCC services its sub-portfolio, with Zenith Service S.p.A. acting as the backup servicer.

PORTFOLIO PERFORMANCE

As of the August 2020 cut-off date, delinquencies stood low, with loans two to three months and 90+ days in arrears representing 0.1% and 1.0% of the outstanding portfolio balance, respectively. However, a significant portion of the portfolio is currently in payment holiday, as further detailed in the following paragraphs. The servicers have not reported any defaults so far.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS

DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its lifetime default and recovery assumptions on the outstanding portfolio to 57.1% and 34.5%, respectively, at the AAA (sf) rating level. The base case one-year PD for the mortgage and nonmortgage loans has been maintained at 5.5% and 3.0%, respectively; however, following adjustments related to the Coronavirus Disease (COVID-19) and considering the mortgage/nonmortgage loans’ differing mix because of the natural portfolio amortisation, the weighted average base case one-year PD has been updated to 6.1%.

CREDIT ENHANCEMENT

Overcollateralisation of the outstanding collateral portfolio and the cash reserve (but only partially) provide credit enhancement to the Class A Notes. As of the October 2020 payment date, credit enhancements to the Class A1 and Class A2 Notes were 98.3% and 52.7%, respectively, up from 83.0% and 44.0%, respectively, as of the issue date in December 2019. The increase in credit enhancements was prompted by the amortisation of Class A1 Notes since the closing date.

The transaction structure benefits from 14 nonamortising cash reserves (one for each BCC), which provide liquidity support and are available to cover senior fees and interest payments on the Class A Notes. Furthermore, if the available funds are not sufficient to cover the scheduled payment, each cash reserve can be used to repay principal on the Class A Notes, up to an amount equal to the difference between (i) the actual cash reserve available at the relevant payment date and (ii) 3.5% of the initial balance of the Class A Notes (hence the cash reserves provide credit enhancement to the rated notes). As of the October 2020 payment date, the aggregate cash reserve was at its target level of EUR 11.6 million, which accounts for 4.0% 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 the account bank, 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 its proprietary 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 increase in the coming months for many SME transactions, some meaningfully. The ratings are based on additional analysis and additional stresses 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. As per DBRS Morningstar’s assessment, 34.8% of the outstanding portfolio balance belonged to industries classified in mid-high- and high-risk economic sectors, respectively, which leads to the underlying one-year PDs to be multiplied by 1.5 and 2.0, respectively, as per the commentaries mentioned below. 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 considered in the asset and cash flow analysis. As of 31 August 2020, around 49.3% of the current portfolio balance benefitted from a coronavirus-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 2 December 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-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 released its “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary, where DBRS Morningstar discussed the overall risk exposure of the SME sector to the coronavirus and provided a framework for identifying the transactions that are more at risk and likely to be affected by the fallout of the pandemic on the economy. 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.

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 the “Rating CLOs Backed by Loans to European SMEs” (30 September 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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 Zenith Service S.p.A., servicer reports and additional information provided by ICCREA, 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 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 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 since the Initial Rating Date on 5 December 2019, when DBRS Morningstar assigned its AAA (sf) ratings to the Class A1 and Class A2 Notes.
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):

-- PD Rates Used: Base case PD of 5.5% for mortgage loans and of 3.0% for nonmortgage loans, a 10% and 20% increase of the base case PD.

-- Recovery Rates Used: Base case recovery rates of 34.5% at the AAA (sf) rating level, a 10% and 20% decrease in the base case recovery rates.

DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf), whereas a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would lead to a downgrade of the Class A Notes to AA (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 U.S. regulations only.

Lead Analyst: Daniele Canestrari, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 5 December 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.

-- Master European Structured Finance Surveillance Methodology (22 April 2020),
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- Rating CLOs Backed by Loans to European SMEs (30 September 2020) and SME Diversity Model v2.4.1.0, https://www.dbrsmorningstar.com/research/367642/rating-clos-backed-by-loans-to-european-smes.
-- Rating CLOs and CDOs of Large Corporate Credit (21 July 2020),
https://www.dbrsmorningstar.com/research/364310/rating-clos-and-cdos-of-large-corporate-credit.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (21 September 2020), https://www.dbrsmorningstar.com/research/366958/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Cash Flow Assumptions for Corporate Credit Securitizations (21 July 2020),
https://www.dbrsmorningstar.com/research/364311/cash-flow-assumptions-for-corporate-credit-securitizations.
-- 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 Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- 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.

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 info@dbrsmorningstar.com.