Morningstar DBRS Upgrades Credit Rating on Valconca SPV S.r.l. (SME)

DBRS Ratings GmbH (Morningstar DBRS) upgraded to AAA (sf) from AA (sf) its credit rating on the Class A Series 2 Notes (the Class A Notes) issued by Valconca SPV S.r.l. (SME) (Valconca SME or the Issuer).

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

CREDIT RATING RATIONALE
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 January 2024 payment date;
-- The one-year base case probability of default (PD) and updated default and recovery rates on the receivables; and
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) credit rating level.

Valconca SME is a static securitisation collateralised by a portfolio of secured and unsecured loans to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families granted and serviced by Banca Popolare Valconca S.p.A. (BPV).

The Bank of Italy placed BPV under extraordinary administration in December 2022 with no disruption in servicing activities for the transaction. After negotiations, BPV was incorporated into Cherry Bank S.p.A. on 19 December 2023.

Around 30.0% of the current portfolio balance (down from 32.7% at the last annual review) is assisted by the Fondo Centrale di Garanzia (FCG) guarantee, a state guarantee that covers up to 100% of the loan balance. The weighted-average coverage for the current portfolio is equal to 87.9%. The unsecured recovery rates have been adjusted to recognise the benefit of the guarantee. In its credit analysis, Morningstar DBRS did not give full credit to the guarantee for credit rating scenarios above BBB (high) (sf), in line with the current long-term Issuer Rating of the Italian sovereign. Moreover, Morningstar DBRS assumed that in all credit rating scenarios a portion of the guarantee would not be honoured to account for possible rescissions of the guarantee due to noncompliance with the terms.

PORTFOLIO PERFORMANCE
As of the 31 December 2023 portfolio cut-off date, loans that were one to two months and two to three months in arrears were low and represented 0.2% and 0.1% of the outstanding portfolio balance, respectively, while loans more than three months in arrears represented 0.2%. The gross cumulative default ratio stood at 3.1% of the initial portfolio.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
The base case one-year PDs for secured and unsecured loans have been maintained at 5.0% and 4.4%, respectively.

Morningstar DBRS 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 36.8%, respectively, at the AAA (sf) credit 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 January 2024 payment date, credit enhancement to the Class A Notes was 50.5%, up from 38.7% as of the January 2023 payment date. The increase in credit enhancement prompted the credit rating upgrade.

The transaction benefits from an amortising cash reserve, available to cover expenses, senior fees, and interest on the Class A Notes. The target cash reserve is equal to 2.0% of the principal outstanding of the Class A Notes, with a floor at EUR 1,100,000. As of the January 2024 payment date, the cash reserve was at its target of EUR 2.2 million.

BNP Paribas, Succursale Italia acts as the account bank for the transaction. Based on the Morningstar DBRS private credit rating of the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit rating assigned to the Class A Notes, in accordance with its "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS’ credit rating on the Class A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS’ long-term credit rating provides opinions on risk of default. Morningstar DBRS 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
Morningstar DBRS considered the presence of loans backed by the FCG Guarantee to be a relevant social factor (Social Impact of Product & Services) as outlined within “Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings”. Morningstar DBRS 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 but did not affect the credit rating.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the “Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS 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 credit rating is “Rating CLOs Backed by Loans to European SMEs” (22 October 2023), https://dbrs.morningstar.com/research/422274.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include investor reports provided Banca Finanziaria Internazionale S.p.A., servicer reports by BPV, and loan-level data provided by the European DataWarehouse GmbH.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of both the initial credit rating and the transaction’s amendment in July 2021, Morningstar DBRS was supplied with third-party assessments. However, this did not impact the credit rating analysis.

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

Morningstar DBRS 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 24 February 2023, when Morningstar DBRS upgraded its credit rating on the Class A Notes to AA (sf) from A (high) (sf).

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com/.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):
-- Probability of Default Rates Used: base case PD of 5.0% for secured loans and of 4.4% for unsecured loans, a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: base case recovery rates of 36.8% at the AAA (sf) rating level, a 10% and 20% decrease in the base case recovery rates.

Morningstar DBRS 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 on the Class A Notes at AAA (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 on the Class A Notes at AAA (sf).

For further information on Morningstar DBRS 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 Morningstar DBRS 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: Pascale Kallas, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 25 July 2018

DBRS Ratings GmbH
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Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

-- Master European Structured Finance Surveillance Methodology (11 December 2023), https://dbrs.morningstar.com/research/425148.
-- Rating CLOs Backed by Loans to European SMEs (22 October 2023) and SME Diversity Model v2.6.1.4.,
https://dbrsmorningstar.com/research/422274.
-- Global Methodology for Rating CLOs and Corporate CDOs (22 October 2023),
https://dbrsmorningstar.com/research/422269.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730.
-- European RMBS Insight Methodology (27 March 2023),
https://dbrs.morningstar.com/research/411634.
-- European RMBS Insight: Italian Addendum (2 October 2023),
https://dbrs.morningstar.com/research/421317.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030.

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com/ or contact us at [email protected].