Press Release

DBRS Morningstar Upgrades Rating on Fanes S.r.l. – Series 2020-1

Structured Credit

March 01, 2023

DBRS Ratings GmbH (DBRS Morningstar) upgraded to AA (high) (sf) from A (sf) its rating on the Series 2020-1 A Notes (the Class A Notes) issued by Fanes S.r.l. – Series 2020-1 (the Issuer or Fanes).

The rating addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date in June 2060.

The rating upgrade follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the December 2022 payment date;
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables; and
-- The credit enhancement currently available to the Class A Notes to cover the expected losses at the AA (high) (sf) rating level.

Fanes is a revolving cash flow securitisation collateralised by a portfolio of secured and unsecured loans to Italian small and medium-size enterprises, entrepreneurs, artisans, and producer families. The portfolio was originated and is serviced by Cassa di Risparmio di Bolzano S.p.A. (CRB). The notes were issued on a partially paid basis and the nominal amounts are equal to EUR 3 billion and EUR 1 billion for the Class A and Class J Notes, respectively. The transaction had a 24-month ramp-up period, which ended in June 2022. During the revolving period, only one subsequent portfolio was purchased by the Issuer.

Around 33.6% of the current portfolio balance is assisted by the Fondo Centrale di Garanzia (FCG) guarantee, a state guarantee that covers up to 100% of the loan balance. DBRS Morningstar adjusted the recovery rates to account for the FCG guarantee.

PORTFOLIO PERFORMANCE
As of the 30 November 2022 portfolio cut-off date, delinquencies were low, with 90+ day arrears representing 0.11% of the outstanding portfolio balance. The gross cumulative default ratio stood at 0.01% of the initial and subsequent portfolio balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
The base case one-year PDs for secured and unsecured loans have been maintained at 4.3% and 2.8%, respectively.

As the ramp-up period ended in June 2022, DBRS Morningstar stopped basing its assumptions on the worst-case portfolio. 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 42.9% and 42.5%, respectively, at the AA (high) (sf) rating level.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio and the cash reserve provide credit enhancement to the Class A Notes. As of the December 2022 payment date, credit enhancement to the Class A Notes was 40.9%, up from 36.3% at closing.

The transaction benefits from an amortising cash reserve available to cover expenses, senior fees, and interest payments on the Class A Notes. The target cash reserve is equal to the greater of 2.0% of the principal outstanding balance of the Class A Notes and 1.2% of the current portfolio, with a floor of EUR 2.4 million. As of the December 2022 payment date, the cash reserve was at its target of EUR 10.3 million.

BNP Paribas, Succursale Italia acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of the account bank, the downgrade provisions outlined in the transaction documents, and the 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors
DBRS Morningstar considered the presence of loans backed by the FCG guarantee to be a relevant social factor (Social Impact of Product & Services) as outlined within the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings”. DBRS Morningstar assumed reduced loss severity for the loans that are backed by the FCG guarantee. This is credit positive given the reduced loss expectations for guaranteed loans.

The Social factor has changed from the prior credit rating disclosure and no longer affects the rating, as the lifetime assumptions of the portfolio have improved compared with the previous annual review, making the rating output less sensitive to the effect of the FCG guarantee.

There were no Environmental/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “Rating CLOs Backed by Loans to European SMEs” (10 June 2022); https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes.

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.

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’s legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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/401817/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include investor reports, additional information, and loan-level data provided by Banca Finanziaria Internazionale S.p.A., and servicer reports provided by CRB.

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 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 1 March 2022, when DBRS Morningstar confirmed its A (sf) rating on the Class A Notes.

The lead analyst responsibilities for this transaction have been transferred to Pascale Kallas.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at www.dbrsmorningstar.com.

Sensitivity Analysis: 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 rating (the base case):

-- PD Rates Used: Base case PD of 4.3% for secured loans and of 2.8% for unsecured loans, a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: Base case recovery rates of 42.9% at the AA (high) (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%, or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A Notes at AA (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would also lead to a confirmation of the Class A Notes at 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. 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: Pascale Kallas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 12 June 2020

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

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.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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