DBRS Morningstar Confirms Rating on Emilia SPV S.r.l. Following Amendment

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating on the Class A Notes issued by Emilia SPV S.r.l. (the Issuer) at A (sf) following an amendment to the transaction (the Amendment).

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal by the final maturity date.

The confirmation follows a review of the transaction and is based on the following analytical considerations:
-- The Amendment to the transaction executed on 23 March 2021 including, inter alia, a 60-month extension of the replenishment period;
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the February 2021 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the A (sf) rating level; and
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The transaction is a revolving securitisation of first-lien residential mortgage loans granted by Credito Emiliano S.p.A. (CREDEM) to individuals and families resident in Italy. CREDEM services the portfolio and also covers the role of account bank while Banca Finanziaria Internazionale S.p.A. acts as backup servicer facilitator. The transaction closed in April 2015 when the Class A and Class B Notes were issued for nominal amounts of EUR 3 billion and EUR 900 million, respectively. At the issue date, the Class A and Class B Notes were partially paid for a subscription price of EUR 816 million and EUR 208 million, respectively.

The initial five-year replenishment period terminated on the May 2020 payment date, with the amortisation period beginning on the August 2020 payment date. The transaction structure provides for partially paid notes that can be subscribed up to their nominal amounts to finance the purchase of subsequent portfolios. The notes can amortise during the replenishment period if certain conditions are met (i.e., if collections are not used to purchase subsequent portfolios but instead are retained in the Issuer’s accounts above a certain threshold). Since the issue date, four subsequent portfolios were sold to the Issuer, three of which were financed with further notes subscriptions.

The Class A Notes subordination during the replenishment period is based on a dynamic credit enhancement mechanism, depending on the credit quality of the pool in terms of loan-to-value (LTV) ratio and portfolio yield. In general, the credit enhancement to the Class A Notes can vary during the replenishment period as the Issuer purchases further portfolios, but can never decrease below the contractual floor of 18.5%. As of the latest payment date in February 2021, the credit enhancement to the Class A Notes was 42.0%, increasing from 32.5% as of the May 2020 payment date (at the time of the latest annual review of the transaction). As of the December 2020 cut-off date, the performing portfolio balance was equal to approximately EUR 729.5 million.

The transaction documents were first amended in June 2017 when certain interest rate renegotiation and repurchase limits were changed. Some transfer limits applicable during the replenishment period were also modified. For more information, please refer to https://www.dbrsmorningstar.com/issuers/20785.

THE AMENDMENT
The Amendment was executed on and is effective as of 23 March 2021. The main changes are summarised below:
-- A 60-month extension of the replenishment period, starting from 23 March 2021. The replenishment period will prematurely terminate if a purchase termination event occurs or if an enforcement notice is delivered to the Issuer.

-- The implementation of a mechanism allowing transfers of receivables on a monthly basis and providing for a deferral of the payment of the relevant purchase price to the immediately following payment date.

-- A change in certain transfer limits applicable during the replenishment period, with respect to the aggregate portfolio:
(1) The minimum contribution of loans secured by properties that are owner-occupied decreased to 75% from 87%,
(2) The maximum contribution of loans secured by properties used as second homes increased to 25% from 13%,
(3) The maximum contribution of loans whose debtor has a SAE code different from 600 decreased to 2% from 3%,
(4) The maximum contribution of loans not originated by CREDEM increased to 10% from 5%,
(5) The minimum contribution of loans whose debtor is resident in northern regions of Italy decreased to 50% from 55%,
(6) The maximum contribution of loans whose debtor is resident in southern regions of Italy increased to 32% from 28%,
(7) The minimum contribution of loans with a floating interest rate up to maturity decreased to 20% from 45%, and
(8) The maximum contribution of loans with a fixed or optional interest rate increased to 75% from 43%.

-- An increase in the limit for interest rate renegotiations with respect to a switch in the interest rate type to fixed/optional/capped from floating, to 10% from 5% of the aggregate of the initial plus subsequent portfolios.

-- A change in the definition of contractual payment suspensions that can be granted to the securitised borrowers to account for the Italian Banking Association agreements with respect to the Coronavirus Disease (COVID-19) moratorium.

-- A change in the minimum rating required to act in the capacity of account bank. The DBRS Morningstar replacement trigger has been lowered to BBB (low) from BBB.

-- The reset of the cumulative default ratio to zero, effective from the new replenishment period start date.

-- A decrease in the maximum rate of interest applicable to the Class A Notes to 4.00% from 4.75%.

-- The introduction of the definition of preamortisation payment date (i.e., any payment date during the replenishment period falling six months after the last purchase of a subsequent portfolio). The preamortisation reimbursement amount as defined in the legal documents would only apply to a preamortisation payment date.

-- A decrease in the minimum weighted-average (WA) fixed interest rate for the calculation of the excess spread add-on component of the required credit enhancement during the replenishment period to 3.25% from 4.00%. The minimum WA spread was maintained at 1.0%.

PORTFOLIO PERFORMANCE
The portfolio is performing within DBRS Morningstar’s expectations. As of the December 2020 cut-off date, arrears were low, with the 90+ delinquency ratio at 0.3% of the portfolio performing balance. Delinquencies show a stable trend over the life of the transaction. Borrowers that were in payment holidays represented around 3.2% of the pool while no defaulted loans were recorded so far. Cumulative repurchases stood at 20% of the aggregate portfolio (including initial and subsequent portfolios), which is within the respective contractual limit.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and, given that the revolving period starts again in March 2021, continues to derive its base case PD and LGD assumptions based on a worst-case portfolio composition as per the replenishment criteria set forth in the transaction legal documents. Additionally, DBRS Morningstar received updated vintage performance data and noted an overall improvement in the historical data performance.

Considering the revolving nature of the transaction and its dynamic credit enhancement features, DBRS Morningstar constructed four portfolios based on the WA LTV and updated its base case PD and LGD assumptions as follows:
-- 10.5% and 24.4%, respectively, for the worst-case portfolio with 75% LTV.
-- 10.6% and 28.0%, respectively, for the worst-case portfolio with 80% LTV.
-- 10.8% and 32.0%, respectively, for the worst-case portfolio with 85% LTV.
-- 10.9% and 34.5%, respectively, for the worst-case portfolio with 90% LTV.

The PD and LGD assumptions consider the updated “European RMBS Insight: Italian Addendum” and corresponding European RMBS Insight Model published on 21 December 2020. To capture certain adverse characteristics that the pool might develop during the replenishment period, DBRS Morningstar increased the risk segment of each loan to a higher segment than otherwise would have been calculated for each loan.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the Class A Notes. Credit enhancement will dynamically change based on the credit quality of the pool in terms of LTV and portfolio yield, but will never decrease below the contractual floor of 18.5%.

The transaction benefits from a cash reserve, which provides liquidity support and is available to cover senior fees and interest payments on the Class A Notes. The reserve is amortising and, as of the February 2021 payment date, its balance was equal to the target level of EUR 25.8 million, or 5.5% of the outstanding balance of the Class A Notes.

During the replenishment period, further cash reserve amounts will be funded as further subscriptions to the notes are made. Specifically, a further cash reserve amount means the sum of (1) 2.25% of the aggregate of the Class A and Class B Notes’ further subscriptions and (2) the set-off exposure exceeding 1.00% of the outstanding principal of the aggregate portfolio (including the subsequent portfolio).

The target cash reserve amount is equal to the aggregate of the initial cash reserve plus any further amount if (1) the Class A Notes outstanding is higher than 50% of its initial balance (including further subscriptions), (2) a breach of a ratio or a cash trapping condition occurred, or (3) the cash reserve was not at its target in the immediately preceding payment date. Otherwise, the target is the higher of (1) 5.5% of the outstanding Class A Notes and (2) 50% of the initial cash reserve (including further amounts).

CREDEM acts as the account bank for the transaction. In the transaction documentation, DBRS Morningstar’s minimum institution rating has been lowered to BBB (low) from BBB as a result of the Amendment. Based on DBRS Morningstar’s private rating on CREDEM, the updated 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 Intex DealMaker.

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 continue to increase in the coming months for many residential mortgage-backed security (RMBS) 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 self-employed borrowers. 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. As of the December 2020 cut-off date, the number of borrowers in payment holiday was not material for the purpose of DBRS Morningstar’s analysis.

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 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-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 is likely to affect the DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360599/european-rmbs-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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the rating are the “Master European Structured Finance Surveillance Methodology” (8 February 2021) and the “European RMBS Insight Methodology” (2 April 2020).

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

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

DBRS Morningstar conducted a review of the amended transaction documents, including the Master Amendment Agreement; the Master Transfer Agreement; the Servicing Agreement; the Intercreditor Agreement; the Terms and Condition of the Notes, the Cash, Allocation, Management and Payment Agreement; the Senior Subscription Agreement; and the Master Definitions Agreement. A review of any other transaction legal documents was not conducted as these 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 Banca Finanziaria Internazionale S.p.A., servicer reports and additional information provided by CREDEM, and loan-level data provided by the European DataWarehouse GmbH. In the context of the Amendment, DBRS Morningstar was also provided with updated historical performance data as follows:

-- Quarterly static default data by vintage of origination, spanning from Q1 2011 to Q4 2020, split by origination channel,
-- Quarterly static recovery data by vintage of default, spanning from Q1 2011 to Q4 2020, split by open and closed positions,
-- Monthly dynamic prepayment data spanning from January 2011 to July 2020, split by floating- and fixed-rate loans, and
-- Monthly dynamic 10+-day delinquency data spanning from January 2011 to July 2020.

DBRS Morningstar did not rely upon third-party due diligence 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 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.

The last rating action on this transaction took place on 11 June 2020, when DBRS Morningstar confirmed its rating on the Class A Notes at A (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 rating, 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.
-- The base case PD and LGD of the current pool of loans for the Issuer are: 10.5% and 24.4%, respectively, for the constructed portfolio with 75% LTV; 10.6% and 28.0%, respectively, for the constructed portfolio with 80% LTV; 10.8% and 32.0%, respectively, for the constructed portfolio with 85% LTV and 10.9% and 34.5%, respectively, for the constructed portfolio with 90% LTV.
-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. Taking the constructed portfolio with 75% LTV as an example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to remain at A (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A Notes would be expected to fall to BBB (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to fall to BBB (high) (sf).

Class A Notes Risk Sensitivity (based on the constructed portfolio with 75% LTV):
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Daniele Canestrari, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 22 April 2015

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Geschäftsführer: Detlef Scholz
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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 (8 February 2021),
https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- 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.
-- 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.
-- European RMBS Insight Methodology (2 April 2020) and European RMBS Insight Model v 5.0.0.1, https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (21 December 2020), https://www.dbrsmorningstar.com/research/371597/european-rmbs-insight-italian-addendum.
-- 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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.