Press Release

DBRS Morningstar Upgrades Credit Rating on Valsabbina SME 3 SPV S.r.l.

Structured Credit

July 17, 2023

DBRS Ratings GmbH (DBRS Morningstar) upgraded its credit rating on the Class A Notes issued by Valsabbina SME 3 SPV S.r.l. (the Issuer) to AA (sf) from A (high) (sf).

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date in July 2060.

The credit rating upgrade follows an annual review of the transaction and is based on the following analytical considerations:
-- The portfolio performance, in terms of delinquencies, defaults, and losses, as of the April 2023 payment date;
-- The one-year base case probability of default (PD), and default and recovery rates based on the current pool of receivables;
-- The current available credit enhancement to the Class A Notes to cover the expected losses at their AA (sf) rating level; and
-- No revolving termination event have occurred so far.

The transaction is a cashflow securitisation collateralised by a portfolio of performing mortgage and non-mortgage loans to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. The loans were mainly granted by Banca Valsabbina S.C.p.A. (Banca Valsabbina), but also by Credito Veronese S.p.A., which was merged into Banca Valsabbina in 2012.

The transaction includes a 24-month revolving period, scheduled to end in July 2023 (included), during which time Banca Valsabbina may sell new receivables (i.e., further portfolios) to the Issuer subject to certain conditions and limitations. During the revolving period, the purchase of new receivables is funded through principal collections. The revolving period will end prematurely if certain events occur, including the cumulative gross default rate exceeding 2.0%, the insufficiency of the available funds to fully replenish the cash reserve, and the insolvency of Banca Valsabbina.

PORTFOLIO PERFORMANCE
As of the April 2023 payment date, loans two to three months in arrears represented 0.02% of the outstanding portfolio balance, up from 0.01% in April 2022. The 90+ delinquency ratio was 0.05%, up from 0.03% and the cumulative default ratio remained at 0.00% during this period.

PORTFOLIO ASSUMPTIONS
DBRS Morningstar conducted a loan-by-loan analysis of the current pool of receivables and maintained its base case PD of 6.5% and 2.7% for mortgage and nonmortgage loans, respectively. Given the fact that the revolving period is ending with the July 2023 payment date, the current portfolio cannot migrate towards the worst case pool any more. Consequently, we switched our default and recovery assumptions, as well as weighted average life of the underlying pool of assets from previously based on worst-case hypothetical pool to the current pool composition. As the result, the expected default rates at AA (sf) rating level decreased to 34.2%, down from 48.2% at previous annual review.

CREDIT ENHANCEMENT
The Class A Notes benefit from credit enhancement of 30.3%, provided by the subordination of the Class B Notes and the cash reserve. The credit enhancement has remained unchanged since transaction closing because of the revolving period.

The transaction includes a cash reserve, which is available to cover senior fees and interest payments on the Class A Notes. The cash reserve will start amortising from the first payment date after the end of the revolving period, subject to the target level being equal to 1.41% of the outstanding balance of the Class A Notes, up to a floor of 0.5% of the initial amount of the Class A Notes. As of the April 2023 payment date, the cash reserve was at its target level of EUR 12.5 million.

BNP Paribas Succursale Italia (BNP Paribas) acts as the transaction account bank. Based on DBRS Morningstar’s private credit rating on BNP Paribas, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the credit rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar’s credit rating on the Class A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligation is listed at the end of this Press Release.

DBRS Morningstar’s credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors
DBRS Morningstar considered that the presence of loans backed by the FCG Guarantee was a significant social factor (Social Impact of Product & Services) as outlined within “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 FCG Guarantee. This is credit positive and affects the credit rating, given the reduced loss expectations for guaranteed loans.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-credit ratings.

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

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit 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.

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 credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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 credit rating include transaction reports provided by Banca Valsabbina and Securitisation Services S.p.A., 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 credit rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 29 July 2022 when DBRS Morningstar confirmed its A (high) (sf) credit rating on the Class A Notes.

Information regarding DBRS Morningstar credit 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 credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the Base Case):
-- PD rates used: One-year base case PD of 3.29%, a 10% and 20% increase on the base case PD.
-- Recovery rates used: Base case recovery rate of 32.4% at the AA (sf) stress level, a 10% and 20% decrease in the base case recovery rates.

For the Class A Notes, DBRS Morningstar concluded 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 (low) (sf), and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (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%, ceteris paribus, would also lead to a downgrade of the Class A Notes to AA (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: https://registers.esma.europa.eu/cerep-publication/. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 29 July 2021

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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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