DBRS Assigns Ratings to Class B Notes Issued by Etruria Securitisation SPV S.r.l. Following Transaction Restructuring and Upgrades Class A Notes

DBRS Ratings Limited (DBRS) has today taken the following rating actions to the Notes issued by Etruria Securitisation SPV S.r.l. (Etruria SPV or the Issuer) as follows:

EUR 125,000,000 Class B Asset-Backed Floating Rate Notes due 2055
(ISIN: IT0005157760): assigned BBB (high) (sf)

EUR 84,720,643 Class A Asset-Backed Floating Rate Notes due 2055
(ISIN: IT0004855299): upgraded to AAA (sf) from AA (low) (sf)

The transaction, which originally closed on 10 October 2012 (Original Issue Date), is a cash flow securitisation collateralised by a portfolio of secured and unsecured bank loans to Italian small and medium-sized enterprises (SMEs) and self-employed individuals granted by Banca Etruria Società Cooperativa (BancaEtruria or the Seller). Following the recent adoption of the Bank Resolution and Recovery Directive (BRRD) in Italy on 16 November 2015, the Italian government has passed a law decree on 22 November 2015 providing for the liquidation of Banca Etruria after the transfer of all balance sheet assets (excluding doubtful loans), some liabilities (deposits and senior bonds) and existing contracts (including for example the servicing and indemnification duties in relation to Etruria SPV) to a new bridge bank, namely Nuova Banca dell’Etruria e del Lazio S.p.A. (Nuova BancaEtruria or the Servicer).

Originally the transaction consisted of EUR 427,000,000 of senior notes (Class A Notes) and EUR 216,987,000 of junior notes. Following today’s restructuring, the junior notes have been split into EUR 125,000,000 of new mezzanine notes (Class B Notes) and EUR 91,987,000 of new junior notes (Class C Notes). The restructuring does not have any impact on the Class A Notes and therefore the upgrade of Class A Notes reflects a review of the transaction performance and the considerable increase of credit enhancement due to the fast deleveraging of the transaction.

The Class A Notes rank senior to the Class B Notes with respect to interest and principal payments. The Class B Notes rank senior to the Class C Notes with respect to interest and principal payments. Although the payment of interest to the Class B Notes is subordinated to the redemption in full of the Class A Notes, the structure allows for interest on the Class B Notes to be paid while the Class A Notes are still outstanding via a new dedicated reserve (Junior Cash Reserve) funded by Nuova BancaEtruria with EUR 6.65 million in the context of the restructuring.

The rating on the Class A Notes addresses timely payment of interest and ultimate payment of principal on or before the Maturity Date (26 January 2055). The rating on the Class B Notes addresses ultimate payment of interest and principal on or before the Maturity Date in January 2055. DBRS does not rate the Class C Notes.

The portfolio was transferred from the Seller to the Issuer on 12 July 2012 (the Original Valuation Date), and has since amortised to reach as of 6 October 2015 (the New Valuation Date) an outstanding balance of EUR 317,953,656 (net of “sofferenze” loans) with 2,550 loans extended to 2,302 borrowers. As of the New Valuation Date, the portfolio consisted of EUR 280,984,265 performing and delinquent loans and EUR 36,969,391 defaulted loans (as per the transaction definition). In addition the cumulative balance of “sofferenze” loans stands at EUR 29,085,450 since the Original Valuation Date.

The asset analysis has been performed on the portfolio as of the New Valuation Date, while DBRS’s final cash flow analysis and credit enhancement figures account for portfolio principal proceeds between the New Valuation Date and 4 December 2015.

The ratings of the Class A Notes and the Class B 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 as per the transaction definitions:
- The granularity of the portfolio in terms of borrower groups concentration. The top borrower, and the top ten and twenty borrowers groups represent 1.4%, 10.8% and 23.0%, respectively, based on DBRS’s top borrower groups.

• The high exposure to the “Building and Development” industry as per DBRS’s classification, which represents 36.9% of the portfolio balance. The second-highest industry (“Retailers (except food & drug)” and the third-highest industry (“Farming/Agriculture”) represent 7.3% and 6.3% of the portfolio balance, respectively.
• The high geographical concentration in the Centre of Italy where Nuova BancaEtruria has its activity in particular in Tuscany (56.7% of the portfolio balance). The second and third-highest concentrated regions, Umbria and Lazio, account for 17.6% and 8.8% of the portfolio balance, respectively.
  • The portfolio benefits from a very high portion of first-lien mortgage loans (77.6% of the portfolio balance) with low loan-to-values (weighted-average portfolio loan-to-value is 38.4%).
    -- The lack of any hedging agreements which increases the exposure to basis and re-pricing risk. This has been addressed in DBRS’s cash flow model. In addition the portfolio has the significant portion of semi-annual loans (41.3% of the portfolio balance).

-- DBRS has modelled a worst-case portfolio based on the Servicer’s permitted variations.

-- For its asset analysis DBRS has assumed as defaulted loans with more than 90 days in arrears and assumed half of the balance defaulted for loans with arrears between 30 and 90 days. According to DBRS’s assumptions, the performing balance amounts to EUR 254,617,175 and the defaulted balance to EUR 75,758,704. In addition DBRS took into account principal proceeds - coming in part from the amortisation of the portfolio from the New Valuation Date and 4 December 2015 - of a total amount of EUR 22,068,889.

--According to DBRS assumptions, the credit enhancement percentages available to the Class A Notes and Class B Notes is 70.5% and 24.2%, respectively. DBRS considers those to be sufficient to support the upgrade of the rating on the Class A Notes and the assigned rating on the Class B Notes.

-- The transaction lacks specific provisions to address the set-off risk, for which DBRS estimates an exposure at 3.2% of the portfolio performing balance based on DBRS assumptions.

-- The presence of a Commingling Reserve, floored at EUR 3 million, to address any shortfall in collections which could be caused by the insolvency of the servicer. This protection will be transferred to the Class B Notes once the Class A Notes are paid in full and cover senior fees and interest on the Class B Notes in the order of the priority of payments. Cassa di Risparmio di Asti S.p.A. is acting as the back-up Servicer since the Original Issue Date. DBRS considers the commingling risk sufficiently mitigated.

-- The nature of the transaction which is static and allows the Class A Notes and the Class B Notes to be pay down as rapidly as possible. There is also an excess spread trapping mechanism which allows payments of the outstanding principal on the most senior notes until redemption before any junior payment is made.

-- The Cash Reserve, put in place at the Original Issue Date, which is available to cover fees and interest of the Class A Notes as long as the Class A Notes are outstanding. The Cash Reserve is at its floor level of EUR 3 million.

-- The Junior Cash Reserve of which an amount equal to the interest on the Class B Notes will be released to pay interest on the Class B Notes as long as the Class A Notes are outstanding and which will act as a standard liquidity reserve covering fees and interest on the Class B Notes replenished at each payment date upon redemption of the Class A Notes. Upon redemption of the Class A Notes the Junior Cash Reserve is maintained at 3.0% of the Class B Notes outstanding balance, with a floor at EUR 1.875 million.

-- The Seller’s credit quality deterioration over the last four years which is reflected in DBRS annualised probability of default.

-- The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting, and servicing practices. In particular DBRS considers that the transfer of activities from BancaEtruria to Nuova BancaEtruria removes the uncertainty on the bank’s capacity to perform the operations and servicing activities.

-- 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 Class A Notes 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 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 Class A Notes and Class B Notes as follows, as per the principal methodology specified below:
-- The annualised probability of default (PD) for the Seller, determined using the historical data supplied, was computed to be 8.08%.
-- The assumed weighted-average life (WAL) of the Portfolio was 5.48 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 69.07% and 12.99% were used for the secured and unsecured loans respectively at the AAA (sf) rating level, 83.06% and 16.35% respectively at the BBB (high) (sf) level. In addition DBRS applied an unsecured recovery rate of 12.99% and 16.35% at AAA (sf) and BBB (high) (sf) stress levels respectively on the defaulted balance according to DBRS assumptions.
-- 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 the parties involved in the rating, including but not limited to the Banca Etruria Società Cooperativa, Nuova Banca dell’Etruria e del Lazio S.p.A., Etruria Securitisation SPV S.r.l. and StormHarbour Securities LLP.
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 Seller 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 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.

The last rating action on this transaction concerning the Class A Notes took place on 2 March 2015 when DBRS confirmed its rating at AA (low) (sf). The lead responsibilities concerning today’s rating action on the Class A Notes have been transferred to Natalia Coman.

The rating on the Class B Notes 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 8.08%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case Recovery Rates of 50.87% and 61.41% respectively at AAA (sf) and BBB (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 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 confirmation of the Class A 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 A Notes at AAA (sf).

With respect to the Class B Notes, DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (low) (sf), while a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would lead to a downgrade of the Class B 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 B Notes at BB (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.

Class A Notes
Initial Lead Analyst: Simon Ross
Initial Rating Date: 10 October 2012
Initial Rating Committee Chair: Jerry van Koolbergen

Lead Surveillance Analyst: Natalia Coman
Most Recent Rating Update: 7 January 2016
Rating Committee Chair: Carlos Silva

Class B Notes
Initial Lead Analyst: Natalia Coman
Initial Rating Date: 7 January 2016
Initial Rating Committee Chair: Carlos Silva

DBRS Ratings Limited
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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 European Securitisations
Cash Flow Assumptions for Corporate Credit Securitizations
Operational Risk Assessment for European Structured Finance Servicers
Operational Risk Assessment for European Structured Finance Originators

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