DBRS Assigns Ratings to Siena PMI 2015 S.r.l.

DBRS Ratings Limited (DBRS) has today assigned ratings to the Class A1A, A1B, A2A, A2B, B and C Notes (the Rated Notes) issued by Siena PMI 2015 S.r.l. (the Issuer) as follows:

EUR 296,000,000 Class A1A Asset-Backed Floating Rate Notes due November 2055
(ISIN: IT0005124828): AAA (sf)
EUR 592,000,000 Class A1B Asset-Backed Floating Rate Notes due November 2055
(ISIN: IT0005124646): AAA (sf)
EUR 300,000,000 Class A2A Asset-Backed Floating Rate Notes due November 2055
(ISIN: IT0005124836): AA (sf)
EUR 150,000,000 Class A2B Asset-Backed Floating Rate Notes due November 2055
(ISIN: IT0005124844): AA (sf)
EUR 390,000,000 Class B Asset-Backed Floating Rate Notes due November 2055
(ISIN: IT0005124851): BBB (high) (sf)
EUR 270,100,000 Class C Asset-Backed Floating Rate Notes due November 2055
(ISIN: IT0005124869): BB (high) (sf)

The transaction is a cash flow securitisation collateralised by a portfolio of bank loans to Italian large corporates, small and medium-sized enterprises, entrepreneurs, artisans and self-employed individuals.. The loans were mainly granted by Banca Monte dei Paschi di Siena S.p.A. (BMPS, the Originator), while 10.7% of the portfolio was originated by Banca Antonveneta S.p.A., Banca Agricola Mantovana S.p.A and Banca Toscana S.p.A. before and after their integration into BMPS in 2013, 2008 and 2009 respectively.

The Class A1A, A1B (Class A1 Notes), A2A and A2B Notes (Class A2 Notes together with the Class A1 Notes, the Senior Notes) are pro rata and pari passu with respect to interest while the Class A1 Notes rank senior to Class A2 Notes with respect to principal. The Class A1A and A1B Notes are pro rata and pari passu in principal payments, as are the Class A2A and A2B Notes. The Class B Notes rank senior to the Class C Notes with respect to interest and with respect to principal. The structure allows for interest on the Class B, C and D Notes to be paid before the principal of the Senior Notes but incorporates triggers on the performance of the portfolio to defer these interest payments after the principal payments of the Senior Notes.

The ratings on the Senior Notes address timely payment of interest and ultimate repayment of principal on or before the Maturity Date in November 2055. The ratings on the Class B and Class C Notes address ultimate payment on interest and ultimate repayment of principal on or before the Maturity Date in November 2055. DBRS does not rate the Class D Notes and the Junior Notes.

The economic effect of the transfer of the portfolio from the Originator to the Issuer took place on 26 June 2015 (the Valuation Date). The portfolio has an aggregate par balance of EUR 3,002.66 million, and consists of 24,683 loans to 22,497 borrowers. As of this date, all loans are performing.

The proceeds from the issuance of the Notes cover only a portion of the purchase price of the portfolio: EUR 164.00 million have been paid back to the originator using principal payments collected from 26 June to 16 July 2015. The asset analysis has been performed on the portfolio as of 26 June 2015, while DBRS’s final cash flow analysis and credit enhancement figures account for the portfolio reduction (i.e. EUR 2,838.66 million).

The ratings of the Rated Notes are based upon DBRS’s review of the following analytical considerations:

--The transaction structure, the form and sufficiency of available credit enhancement, the portfolio characteristics:
- Leaving aside the top borrower, which accounts for 4.1% of the portfolio balance, the transaction is fairly granular in terms of borrower concentration. The top ten and twenty borrowers represent 10.9% and 13.2% of the portfolio, respectively. DBRS applied a 22.27% 1-year probability of default (in line with a CCC-rated exposure) to the top borrower to account for its large exposure. Such borrower also carries operational risk as it pays by wire transfer, as opposed to direct debit, which is the payment method for the vast majority of the pool.

• The composition in terms of industry is granular, although the top industry, “Building and Development” as per DBRS’s classification, captures 26.0% of the portfolio balance. The second-highest industry (“Farming/Agriculture”) and the third-highest industry (“Business equipment and services”) represent 9.8% and 9.3% of the portfolio, respectively.
• 8.2% of the portfolio balance comprises loans granted to develop renewable energy projects which benefit from subsidies that secure the rate of return for delivered electric output over a 20-year period (the “feed-in tariff”). A small portion of these loans (0.75% of the total portfolio balance) has been granted to companies whose sole business function is the production and sale of electricity. DBRS applied conservative loss assumptions with regard to these loans to account for any potential linkage between the continuation of such subsidies and the sovereign credit quality.
• The geographical concentration reflects BMPS’s branch distribution across Italy (the top three regions Tuscany, Veneto and Lazio account for 21.9%, 17.0% and 13.4%, respectively).
  • The portfolio is mainly unsecured (89.2% according to DBRS’s classification) which is reflected in DBRS low recovery rates.

-- The transaction lacks mitigants to address the high set-off risk, which DBRS estimates at 8.1% of the portfolio balance. This was accounted for in DBRS’s cash flow analysis.

-- The lack of strong mitigants to address the commingling risk: the appointment of Zenith Service S.p.A. as Back-up Servicer is cold in DBRS’s view. Accordingly, DBRS has applied a loss at each target rating level in its cash flow analysis.

-- The credit enhancement percentages for the Class A1 Notes, Class A2 Notes, Class B Notes and Class C Notes are 69.94%, 54.08%, 40.34% and 29.61%, respectively. DBRS considers those to be sufficient to support the assigned ratings.

-- The effective interest deferral triggers (based on cumulative default on the portfolio ), which limits the leakage of excess spread available for the redemption of the Senior Notes, B Notes and C Notes.

-- The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting, and servicing practices.

-- The Cash Reserve, which is available to cover fees and interest of the Senior and Class B Notes as long as these Classes are outstanding. The Cash Reserve is amortising, with a target amount set at 2% of the Senior and Class B Notes, and covers interest on the Class B Notes up to 30% of cumulative defaults on the portfolio. The Cash Reserve is funded by part of the Junior Notes issuance.

-- 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 terms of their investment. 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 Issuer and the non-consolidation of the Issuer, as well as consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS determined the ratings of the Rated Notes as follows, as per the principal methodology specified below:
-- The annualised probability of default (PD) for BMPS, determined using the historical data supplied, was computed to be 4.32%.
-- The assumed weighted-average life (WAL) of the Portfolio was 4.20 years.
-- 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 45.62% and 12.55% were used for the secured and unsecured loans respectively at the AAA (sf) rating level, 51.53% and 14.65% respectively at the AA (low) (sf) rating level, 65.38% and 15.81% respectively at the BBB (high) (sf) level and 72.03% and 19.99% respectively at the BB (high) (sf) 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 referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: 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 Originator, the Issuer and the Arranger, Banca Monte dei Paschi di Siena S.p.A.
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. Due to the lack of dynamic delinquency data which DBRS usually uses to make up for the non-standard default definition, DBRS used additional cure rates data provided by the Originator to determine a conservative average annual default rate.
Historical performance data also covered loans originated by by Banca Antonveneta S.p.A., Banca Agricola Mantovana S.p.A and Banca Toscana S.p.A. before their acquisition and integration into the BMPS banking group.

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

DBRS was supplied with third-party reports related to certain agreed upon procedures performed on the sample of portfolio information. However, this did not impact the rating analysis.

DBRS considers the information available to it 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 are available on www.dbrs.com.

To assess the impact of a change in the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- Probability of Default Rates Used: Base Case PD of 4.32%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case Recovery Rates of 16.14%, 18.65%, 21.19% and 25.64% respectively at AAA (sf), A (sf), BBB (high) (sf) and BB (high) (sf) stress levels and a 10% and 20% decrease in the respective base case Recovery Rate. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

With respect to the Class A1 Notes, 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 each lead to a confirmation of the Class A1 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 lead to a confirmation of the Class A1 Notes at AAA (sf).

With respect to the Class A2 Notes, 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 each lead to a downgrade of Class A2 Notes to A (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a confirmation of the Class A2 Notes at AA (sf).

With respect to the Class B Notes, 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 each lead to a downgrade of Class B Notes to BBB (low) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a confirmation of the Class B Notes at BBB (sf).

With respect to the Class C Notes, 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 each lead to a downgrade of the Class C Notes to BB (low) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a confirmation of the Class C Notes at BB (high) (sf).

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 historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Initial Lead Analyst: Marcello Bonassoli
Initial Rating Date: 6 August 2015
Initial Rating Committee Chair: Jerry van Koolbergen

DBRS Ratings Limited
1 Minster Court, 10th Floor Mincing Lane, London EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

The rating methodologies 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 CLOs and CDOs of Large Corporate Credit
Legal Criteria for European Structured Finance Transactions
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
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
Unified Interest Rate Model for European Securitisations

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