DBRS Assigns Final Ratings to 2014 Popolare Bari SME S.R.L.

DBRS Ratings Limited (“DBRS”) has today assigned final ratings to the Notes issued by 2014 Popolare Bari SME S.R.L. (the “Issuer”), as follows:

• EUR 50,000,000 Class A1–Asset Backed Floating Rate Notes due June 2054: AAA (sf)
• EUR 120,000,000 Class A2a–Asset Backed Floating Rate Notes due June 2054:AAA (sf)
• EUR 15,100,000 Class A2b–Asset Backed Floating Rate Notes due June 2054: AAA (sf)
• EUR 35,000,000 Class B–Asset Backed Floating Rate Notes due June 2054: AA(low) (sf)

(collectively the “Rated Notes”)

The transaction is a cash flow securitisation collateralised by a portfolio of bank loans to Italian small and medium-sized enterprises (“SMEs”), entrepreneurs, artisans and self-employed individuals which were granted by Banca Popolare di Bari S.C.p.A. (“BPB”) and Cassa di Risparmio di Orvieto S.p.A. (“CRO” and collectively with BPB, the “Originators”).

The Class A1 Notes, Class A2a Notes and Class A2b Notes (collectively, the “Senior Notes”) are pro rata and pari passu in interest, while the Class A1 Notes will rank senior to the Class A2a and A2b Notes (collectively, The Class A2 Notes”) with respect to principal payments. The Senior Notes will rank senior to the Class B Notes with respect to principal payments. However, the payments of interest due on the Class B Notes will rank senior to the repayment of principal on the Senior Notes unless/until the Class B Notes Subordination Event is triggered (when the cumulative defaults exceed 41%). The ratings on Class A1 Notes, Class A2a, and ClassA2b Notes address the timely payment of interest and the ultimate payment of principal payable on or before the Maturity Date in November 2054. The rating on the Class B Notes addresses the ultimate payment of interest and the ultimate payment of principal payable on or before the Maturity Date in November 2054. DBRS does not rate the Class J1 Notes of the Class J2 Notes (the “Junior Notes”).

The economic effect of the transfer of the portfolio from the Originators to the Issuer took place on 14 July 2014 (the “Effective Date”) with an aggregate par balance of EUR 336.5 million, consisting of 3,370 loans to 2,996 borrower groups. As of this date, the portfolio was performing without any loans in arrears.

The ratings are based upon DBRS’s review of the following items:
• The transaction structure, the form and sufficiency of available credit enhancement, the portfolio characteristics:
-- The portfolio consists of loans to borrowers concentrated in the southern regions of Italy where BPB is based and the region of Umbria where CRO is focused. The top three regions include Puglia Campania and Basilicata, representing 43.4%, 14.8% and 12.3% of the outstanding portfolio notional at closing, respectively. Overall, the portfolio regional concentrations reflect the distribution of the Originators’ branches across Italy.
-- The largest 3 borrower groups each represent between 1% and 1.5% of the portfolio notional. However all remaining borrower exposures are below 1% with top ten and top 30 borrowers representing 8.1% and 15.7% of the outstanding portfolio notional at closing, respectively.
-- There is low industry sector concentration as determined under DBRS industry definitions. The largest industry in the Portfolio is “Building and Development”, at 24.9% of the outstanding portfolio notional. “Food Products” and “Farming/Agriculture” complete the top three industries, representing 9.0% and 8.4% of the outstanding principal balance, respectively.
-- BPB will act as Master Servicer, with BPB and CRO acting as the Servicer for their respective portions of the portfolio. Zenith Service S.p.A. will be the Back-up Servicer. While DBRS views the appointment of a Back-up Servicer at closing as a general strength, DBRS acknowledges that Zenith has not yet completed many activities associated with “warm” or “hot” back-up arrangements and there is little practical evidence of the time actually required for a back-up servicer to effectively take over the servicing responsibilities. However, Law Decree No. 91 issued in June 2014 (still subject to conversion into law) introduce certain amendments to the Securitisation Law that among other will make immediately available to the SPV the amounts collected by the servicer and collection bank if they become subject to insolvency proceedings which will reduce the risk of commingling. However, given that such law decree still needs to be converted into law to become effective DBRS also stressed in its analysis the interruption of interest and principal proceeds for a period of 6 months by assuming senior expenses and interest on the Senior Notes would be paid from the Liquidity Reserve for this period.
-- The transaction does not have mitigants dedicated to the set-off risk. This was factored into DBRS’s analysis of the transaction.
-- The credit enhancements for the Class A1 Notes, Class A2 and Class B Notes are 87.1%, 47.0%, and 36.6% respectively, which DBRS considers to be sufficient to support the AAA (sf) on the Class A1 and Class A2 Notes and the AA (high) (sf) ratings on Class B Notes, respectively.
• The priority of payments uses the excess interest to amortise the Rated Notes before junior payments are made. Furthermore, a trigger when Cumulative Defaults exceed 41% will defer Class B Notes interest subordinate to Class A Notes principal payments.
• The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting, and servicing practices.
• The Cash Reserve (“CR”), which will be available to cover any shortfalls in the senior fees and interest on the Rated Notes. The CR is non-amortising, which will increase the liquidity protection to the Rated Notes as they pay down. The balance of the CR will be maintained at EUR 6.6 million and has been funded through the proceeds of the Class J Notes.
• An assessment of the operational capabilities of key transaction participants.
• The ability of the transaction to withstand stressed cash flow assumptions and repay Noteholders according to the approved terms. Interest and principal payments on the Rated Notes will be made quarterly.
• The soundness of the legal structure and the presence of legal opinions which address the true sale of the assets to the trust and the non-consolidation of the Issuer, as well as consistency with the DBRS “Legal Criteria for European Structured Finance Transactions”.

DBRS determined the ratings of the Class A1 Notes, Class A2a Notes, Class A2b Notes, and Class B Notes as follows, as per the principal methodology specified below:
• The combined annualised probability of default (“PD”) for BPB and CRO, determined using the arrears data supplied, was computed to be 3.55%.
• The assumed weighted average life (“WAL”) of the portfolio was 5.10 years, after consideration of permitted variations.
• The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the target rating.
• The recovery rate was determined by considering the market value declines (“MVDs”) for Italy, the security level, and the type of collateral. Recovery rates of 72.67% and 13.24% were used for the secured and unsecured loans (respectively) at the AAA (sf) rating level, and 80.05% and 15.56% (respectively) at the AA (low) (sf) rating level.
• The break even rates for the interest rate stresses and default timings were determined using the DBRS Cash Flow Model.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable is “Rating CLOs Backed by Loans to European Small and Medium Sized Enterprises (SMEs)”. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

All DBRS methodologies can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisation in the EURO Area” at: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include the parties involved in the rating, including but not limited to the Originators, the Issuer and the Arranger, J.P. Morgan Securities plc.

The vintage performance data provided did not match the definition that DBRS bases its analysis on. The historical performance data was based on the “sofferenza” definition of default, which is different to the standard of 90 days used by DBRS. However, DBRS used additional dynamic arrears data provided by the Originators to determine a conservative average annual default rate. DBRS considers the overall information received for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies is available on www.dbrs.com.

To assess the impact a change of the transaction parameters would have on the ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the ratings (the “Base Case”):
• Probability of Default Rates Used: Base Case PD of 3.55%, a 10% and 20% increase on the base case PD.
• Recovery Rates Used: Base Case Recovery Rates, corresponding to a recovery rate of 32.45% at the AAA (sf) stress level and 36.33% at the AA (low) (sf) stress level, a 10% and 20% decrease in the Base Case Recovery Rates.

DBRS concluded that a hypothetical increase of the Base Case PD by 20% would not impact the AAA (sf) ratings on the Class A1 Notes and would result in a one notch downgrade of the Class A2 and Class B Notes to AA (high)(sf) and A (high) (sf), respectively. A decrease in the recovery rate assumption by 20% would not impact the AAA (sf) rating on the Class A1 Notes and would result in a one notch downgrade of the Class A2 and Class B Notes to AA (high)(sf) and A (high) (sf), respectively. A scenario combining an increase in the PD by 10% and a decrease in the recovery rate assumption by 10% would not impact the AAA (sf) rating on the Class A1 Notes and would result in a one notch downgrade of the Class A2 and Class B Notes to AA (high)(sf) and A (high) (sf), respectively.

It should be noted that the interest rates and other parameters that would normally vary with rating level, including the recovery rates, were allowed to change as per the DBRS methodologies and criteria.

For further information on DBRS’s historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see: http://cerep.esma.europa.eu/cerepweb/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Carlos Silva
Initial Rating Date: 05 August 2014
Initial Rating Committee Chair: Jerry van Koolbergen, MD U.S. & European Structured Credit

DBRS Ratings Limited
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London, EC3R 7AA
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Registered in England and Wales: No. 7139960

The rating methodologies and criteria used in the analysis of this transaction can be found at:
http://www.dbrs.com/about/methodologies

“Rating CLOs Backed by Loans to European Small and Medium Sized Enterprises (SMEs)”
“Rating Methodology for CLOs and CDOs of Large Corporate Credit”
“Legal Criteria for European Structured Finance Transactions”
“Unified Interest Rate Model for U.S. and European Structured Credit”
“Cash Flow Assumptions for Corporate Credit Securitizations”
“Operational Risk Assessment for European Structured Finance Servicers”
“Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”