DBRS Assigns Rating to Lanterna Finance S.r.l.

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

-- EUR 385,000,000 Class A Asset Backed Notes due October 2065 rated AA (sf)

The transaction (Lanterna Finance) is a cash flow securitisation collateralised by a portfolio of bank loans to Italian small and medium-sized enterprises. The loans were transferred by Banca Carige S.p.A. (Banca Carige), Banca Carige Italia S.p.A. (Carige Italia), Banca Del Monte di Lucca S.p.A. (BML), Cassa di Risparmio di Carrara S.p.A. (CRC) and Cassa di Risparmio di Savona S.p.A. (CARISA, and together the Originators), which are all part of Banca Carige banking group (Carige Group). A small portion of the portfolio (0.7%) was originated by branches owned by UniCredit, Intesa San Paolo and Banca Monte dei Paschi di Siena before being acquired and integrated into Carige Group between 2008 and 2010. Lanterna Finance is the sixth securitisation transaction carried out by the Carige Group and the first of SME loans.

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. DBRS does not rate the Class B Notes.

The economic effect of the transfer of the portfolio from the Originators to the Issuer took place on 18 October 2015 (the Effective Date). As of the Effective Date, the portfolio consisted of 8,597 loans extended to 6,243 borrowers, with an aggregate par balance of EUR 712.47 million. The portfolio also contained EUR 11.2 million (1.6%) of loans in arrears by no more than 48 days.

On 23 November 2015, CARISA was merged into Banca Carige. As a consequence of the merger, Banca Carige has assumed all CARISA’s existing liabilities and obligations and any reference to CARISA in the Transaction Documents should now be read as a reference to Banca Carige.

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

-- The portfolio characteristics:
-- As per DBRS’s industry classification, the portfolio exhibits a very high concentration towards “Building & Development”, which represents 52.5% of the portfolio. Such concentration is higher when compared to the Originators’ book, as well as the average of the Italian banking system. DBRS believes the risk stemming from the concentration is captured by the agency’s default assumptions at the AA scenario (74.14%). In addition, within the “Building & Development” sector, the securitised portfolio is relevantly more exposed to the Real Estate Activities sector (as per NACE industry classification) which in Italy has showed better default performance compared to the Construction sector.
-- The portfolio benefits from a high portion of mortgage loans (66.4% of the initial portfolio) with low loan-to-values (the weighted-average portfolio loan-to-value is 49.5%).
-- Aside from the top borrower, the portfolio is fairly granular. The exposure to the largest one, ten, and twenty borrower groups represents 1.7%, 8.6%, and 13.4% of the portfolio, respectively. The portfolio’s geographical concentration reflects the Carige Group’s presence in Liguria, Tuscany and Lombardy.

-- The priority of payments, which ensure all excess spread is used to amortise the Class A Notes.

-- The insufficient mititgants dedicated to cover commingling risk, which for this transaction is increased by the concentration of collections on the last day of June and December given that all loans pay at the end of the month and 54.9% of the portfolio pays semi-annually. Zenith Service S.p.A. has been appointed as Back-up Servicer, which DBRS considers insufficient to mitigate commingling risk. DBRS has modelled a loss in its cash flow model to cover for commingling risk.

-- The exposure to interest rate risk, which is mitigated by the presence of a 4% (per annum) cap on the Class A Notes coupon. The interest payable on Class A Notes is also floored at zero. DBRS has also factored an adjustment to account for basis and repricing risk.

-- The absence of mechanisms to address set-off risk.

-- The Cash Reserve (CR), which is amortising and will be maintained at 2.5% of the outstanding balance of the Class A Notes (initial balance equal to EUR 9.5 million), with a floor of EUR 5.7 million. The CR will be available to cover shortfalls in relation to senior fees and Class A Notes interest.

-- The credit enhancement for the Class A Notes is 47.3%.

-- The servicing mechanics, whereby each Originator will act as Servicer for the loans it has sold to the Issuer (Banca Carige will service the loan transferred by CARISA).

-- 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 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 rating of the Class A 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 6.18%.
-- The assumed weighted-average life (WAL) of the portfolio was 5.77 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 64.14% and 15.69% were used for the secured and unsecured loans respectively at the AA (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)”. 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 UniCredit Bank AG, the Arranger, and Banca Carige S.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 6.18%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 46.3% at the AA (sf), 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 AA (low) (sf) and A (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 A (low) (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 December 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
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