DBRS Assigns Ratings to Claris SME 2015 S.r.l.

DBRS Ratings Limited (DBRS) has today assigned ratings to the Class A and Class B Notes issued by Claris SME 2015 S.r.l. (the Issuer) as follows:

-- EUR 1,270,000,000 Class A Asset Backed Floating Rate Notes due October 2062 rated A (high) (sf)
-- EUR 290,000,000 Class B Asset Backed Floating Rate Notes due October 2062 rated BB (sf)

The transaction (Claris SME 2015) is a cash flow securitisation collateralised by a portfolio of bank loans to Italian small and medium-sized enterprises, large corporates, producer families and non-business entities. The loans were mainly originated by Veneto Banca S.c.p.a. (VB) and bancApulia S.p.A. (BAP, part of VB group), while 7.5% of the portfolio was originated by BAP, Cassa di Risparmio di Fabriano e Cupramontana S.p.A., Banca Popolare di Intra S.p.A. and Banca Popolare di Monza e Brianza S.p.A. before their full integration into the VB group during 2007-2010.

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date, while the rating on Class B Notes addresses the ultimate payment of interest and principal on or before the Final Maturity Date. DBRS does not rate the Class J1 and J2 Notes.

VB and BAP (the Originators) transferred a first portfolio to the Issuer in May 2015 and subsequently a second portfolio in October 2015, totalling EUR 3,028 million. A portion of the purchase price of the first portfolio was financed with a bridge loan granted by JPMORGAN Chase Bank N.A., Milan Branch (the Lender). On 16 October 2015, the Originators repurchased all loans included in the first portfolio (EUR 908 million) that no longer met any of the transfer criteria (including all loans in arrears) with economic effect as of 1 October 2015. On the Issue Date, the proceeds of such repurchase and of the issuance of the Notes together with interest and principal collections received until 1 October 2015 from the first portfolio will be used to (1) repay the bridge loan and interest/expenses due on it, (2) pay the remaining purchase price of the portfolio to the Originators and (3) fund the Cash Reserve (CR) and expenses account.

Despite being a creditor of the Issuer, the Lender is not part of the Intercreditor Agreement or any other transaction document. However, DBRS has been provided with an extract of the executed bridge loan agreement, which includes non-petition provisions signed by the Lender in line with DBRS’s expectations to ensure bankruptcy remoteness of the Issuer in the context of Italian law. Prospective investors should be aware that DBRS was not provided with the entire copy of the bridge loan agreement and therefore has been unable to verify if any additional liability could arise against the Issuer from such agreement in the future.

As of 1 October 2015, the portfolio consisted of 13,074 loans extended to 11,058 borrowers, with an aggregate par balance of EUR 1,953 million. Some loans included in this transaction (approximately 30% of the initial portfolio) were also part of the previous SME CLO of the Originators, Claris SME 2012 S.r.l., which was unwound in September 2015.

The rating of the Class A and B Notes is based upon DBRS’s review of the following items:

-- The portfolio characteristics:
-- The portfolio benefits from a short weighted-average life (4.09 years, extended in DBRS analysis to 5.02 years to account for servicer permitted variations) and a high portion of first-ranking mortgage loans (47.2% of the initial portfolio) with low loan-to-values (the weighted-average portfolio loan-to-value is 42.6%).
-- The portfolio is very granular. The exposure to the largest one, ten, and twenty borrowers represent 0.8%, 5.0%, and 8.1% of the portfolio, respectively. As per DBRS’s industry classification, the portfolio exhibits a high concentration towards “Building & Development”, which represents 38.9% of the portfolio. The portfolio’s geographical concentration reflects the VB group’s presence in Veneto, Lombardy and Puglia.
-- Some loans (0.8% of the portfolio) have been granted to non-business entities (e.g., NGOs), which were assigned a 100% probability of default in DBRS’s analysis.

-- The effective deferral trigger on Class B interest (cumulative default above 12%), which limits the leakage of excess spread available to redeem Class A Notes. Aside from interest payments, all excess spread will be used to pay down Class A, and, after their redemption in full, Class B Notes.

-- The servicing mechanics, whereby VB will act as Servicer and will delegate to BAP the servicing activities in relation to the loans sold by BAP. The appointment of Securitisation Services S.p.A. as Back-up Servicer is cold in DBRS’s view. To account for the lack of adequate mitigants to the commingling risk, a loss has been factored into the rating analysis.

-- The transaction does not have mitigants dedicated to the set-off risk, which, for this transaction, is also higher than what DBRS has estimated for other Italian transactions.

-- The CR, which is amortising and will be maintained at 3.0% of the outstanding balance of the Class A Notes (initial balance equal to EUR 38.1 million), with a floor of EUR 5.0 million. The CR will be available to cover shortfalls in relation to senior fees and Class A Notes interest and only on the payment date on which the Class A Notes will be paid in full, the CR could be used to support the Class B Notes (the CR is not included in the credit enhancement for Class B Notes).

-- The credit enhancement for the Class A and Class B Notes is 36.9% and 20.1%, respectively.

-- The interest rate swap agreement (Swap), which provides protection against interest rate risk for fixed-rate loans. The Swap is also designed to cover the basis risk of the floating-rate loans, but it does not fully comply with DBRS Derivative Criteria for basis swaps in relation to the posting of collateral.

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

-- 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 Class A and Class B 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 as well as consistency with the DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS determined the ratings of the Class A and Class B Notes as follows, as per the principal methodology specified below:
-- The annualised probability of default (PD) for the securitised portfolio, determined using the historical data supplied, was computed to be 5.25%.
-- The assumed weighted-average life (WAL) of the Portfolio was 5.02 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 80.30% and 15.99% were used for the secured and unsecured loans respectively at the A (high) (sf) rating level and 91.69% and 21.19% respectively at the BB (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)”. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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 J.P. Morgan Securities plc, the Arranger, and Veneto Banca S.c.p.a., one of the Originators.

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.

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 past due definition used by DBRS. Additional dynamic arrears data were provided by the Originators to determine a conservative average annual default rate. Despite the above, 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 changing 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 5.25%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case Recovery Rate of 44.2% at the A (high) (sf) and 52.1% at the BB (sf) stress levels, a 10% and 20% decrease in the base case Recovery Rate. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

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 downgrade of Class A Notes to A (low) (sf) and BBB (high) (sf), respectively, and of the Class B Notes to BB (low) (sf) and B (high) (sf), respectively. 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 to BBB (high) (sf) and of the Class B Notes to B (high) (sf).

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: 2 November 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
Derivative Criteria for European Structured Finance Transactions
Unified Interest Rate Model for European Securitisations
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

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