DBRS Assigns Rating to Abruzzo 2015 SME S.r.l.

DBRS Ratings Limited (DBRS) has today assigned a rating to the Class A Notes (the Senior Notes) issued by Abruzzo 2015 SME S.r.l (the Issuer) as follows:

EUR 322,900,000 Class A Asset-Backed Floating Rate Notes due November 2065
(ISIN: IT0005125593): A (sf)

The transaction is a cash flow securitisation collateralised by a portfolio of bank loans to Italian small and medium-sized enterprises, entrepreneurs, artisans and self-employed individuals. The portfolio of loans was granted by two banks, Banca Tercas S.p.A. (66.17%) and Banca Caripe S.p.A. (33.83%) (together the Originators).

The rating on the Senior Notes addresses timely payment of interest and ultimate repayment of principal on or before the Maturity Date in November 2065. DBRS does not rate the Class J1 or Class J2 Notes (together the Junior Notes).

The Valuation Date of the portfolio was 30 April 2015 and the economic effect of the transfer of the portfolio from the Originators to the Issuer took place on 22 July 2015 (the Transfer Date). The portfolio has an aggregate par balance of EUR 547,316,740.69 million, and consists of 4,671 loans to 3,607 borrowers. As of this date, all loans are performing.

The proceeds from the issuance of the Notes cover not only the purchase price of the portfolio but, additionally, the Junior Notes also fund the Liquidity Reserve set at EUR 9,688,260.31 million which is 3% of the Senior Notes balance at issuance date. The asset analysis has been performed on the portfolio as of Transfer Date.

The rating of the Senior Notes is based upon DBRS’s review of the following analytical considerations:

--The transaction structure, the form and sufficiency of available credit enhancement, the portfolio characteristics:
- The portfolio is fairly granular in terms of borrower concentration aside from the top borrower at 2.41% and the top ten represent 13.26% of the portfolio. DBRS accounted for the concentration towards the top borrower by applying a 22.27% 1-year probability of default (in line with a CCC-rated exposure) to the top borrower.

• The composition in terms of industry in the top industry, “Building and Development” as per DBRS’s classification, captures 37.71% of the portfolio balance. The second-highest industry (“Lodging & casinos”) and the third-highest industry (“Retailers, except food & drug) represent 10.8% and 10.7% of the portfolio, respectively.
• The geographical concentration reflects each Originator’s branch distribution across Italy (the top three regions Abruzzo, Marche and Lazio account for 78.4%, 6.0% and 5.4%, respectively).
  • The portfolio is mainly secured (72.1% according to DBRS’s classification) which is reflected in DBRS recovery rates.

-- The transaction lacks mitigants to address the set-off risk, which DBRS estimates at 2.00% of the portfolio balance. This was accounted for in DBRS’s cash flow analysis.

-- The appointment of Zenith Service S.p.A. as a Back-up Servicer is warm in DBRS’s view. To further account for the lack of inadequate mitigants to the commingling risk, a loss has been factored into the rating analysis.

-- The credit enhancement percentages for the Class A Notes is 42.77%, which DBRS considers to be sufficient to support the A (sf) rating.

-- The priority of payments, which ensures that the excess interest is fully used to amortise the Class A Notes before junior payments are made.

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

-- The Liquidity Reserve, which is available to cover fees and interest of the Senior Notes as long as these notes are outstanding. The Liquidity Reserve is non-amortising, with an amount set at 3% of the Senior Notes at Issuance date. 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 Senior 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 rating of the Senior Notes as follows, as per the principal methodology specified below:
-- The annualised probability of default (PD) for the Originators, determined using the historical data supplied, was computed to be 7.81%.
-- The assumed weighted-average life (WAL) of the Portfolio was 6.06 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 72.16% and 16.25% were used for the secured and unsecured loans respectively at the A (sf) rating level. As evidenced by the data submitted to DBRS and the nature of origination, servicing and foreclosure processes involved specific to these Originators, DBRS has assumed higher foreclosure costs and longer recovery timings. In its cash flow analysis, DBRS has assumed seven years recovery lag for the secured loans while applying 2.25 years recovery lag to the unsecured portion of the portfolio.
-- 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 Originators, the Issuer and the Arranger, JP 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. Additional dynamic arrears data were provided by the Originator to determine a conservative average annual default rate. DBRS opted to use dynamic delinquency data based on numbers, adjusted with a multiplier to derive the comparable input data. Despite the above, DBRS considers the overall information available to it for the purposes of providing this rating was of satisfactory quality.

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

DBRS was supplied with third-party assessments. 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 7.81%, a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rates of 56.57% at A (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 A 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 A Notes to BB (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 downgrade of the Class A Notes at BBB (high) (sf).

It should be noted that the interest rates and other parameters that would normally vary with the 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: Mudasar Chaudhry
Initial Rating Date: 12 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

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