DBRS Takes Multiple Rating Actions on BPL Mortgages S.r.l., Series VII following Transaction Restructuring

DBRS Ratings Limited (DBRS) has today taken the following rating actions on the notes issued by BPL Mortgages S.r.l. (the Issuer), in the context of the seventh securitization transaction (BPL VII) originated by the Issuer, as follows:

-- EUR 1,936,000,000 Series A2–2016 Asset Backed Floating Rate Notes due November 2054 assigned a new rating of A (sf)
-- EUR 1,000,000 Series B2–2016 Asset Backed Floating Rate Notes due November 2054 assigned a new rating of BBB (high) (sf)
-- EUR 310,927,405 Class A–2014 Asset Backed Floating Rate Notes due November 2054 confirmed at A (sf)
-- EUR 269,300,000 Class B–2014 Asset Backed Floating Rate Notes due November 2054 upgraded to BBB (high) (sf) from BBB (low) (sf).

The transaction originally closed on 30 June 2014. BPL VII is a cash flow securitisation collateralised by a portfolio of bank loans to Italian small and medium-sized enterprises (SMEs), entrepreneurs, artisans and self-employed individuals that were granted by Banco Popolare Società Cooperativa (BP or the Originator) or by one of its regional banks that have now been fully merged into BP.

The transaction originally consisted of EUR 1,077,400,000 of senior notes (Class A–2014), EUR 269,300,000 of mezzanine notes (Class B–2014) and EUR 448,898,000 of junior notes (Class C–2014) backed by a EUR 1,792.24 million portfolio (Initial Portfolio). Following today’s restructuring, the Issuer has acquired a further portfolio (Subsequent Portfolio) from BP (EUR 2,564.50 million as of 25 January 2015) and has sold all loans in arrears by 57 days or more comprised in the Initial Portfolio as of 25 January 2016 back to BP at par (EUR 189.22 million). Approximately 70% of the Subsequent Portfolio comes from the previous SME CLOs of BP rated by DBRS, BPL VI, which BP unwound on 19 February 2016 and the remaining 30% from newly originated loans by BP in the last two years.

All proceeds coming from the Initial Portfolio up to 31 January 2016 (but excluding proceeds from the repurchase of loans in arrears) have been used to pay down the Class A–2014 Notes on the 25 February 2016 payment date. The balance of the Initial Portfolio as of 31 January 2016 was EUR 888.51 million.

To finance the purchase of the Subsequent Portfolio (whose price has been partially set-off with the amounts due by BP to the Issuer for the repurchase of loans in arrears), BPL VII has issued three new classes of notes, EUR 1,936,000,000 of senior notes (Series A2–2016), EUR 1,000,000 of mezzanine notes (Series B2–2016) and EUR 448,072,000 of junior notes (Series C2–2016). The 2016 notes replicate exactly the same seniority and features of the 2014 notes given that Class A–2014 and Series A2–2016 Notes (Class A Notes) are pari-passu and pro rata with respect to interest and principal payments and Class B–2014 and Series B2–2016 Notes (Class B; together with the Class A Notes, the Rated Notes) are also pari-passu and pro rata with respect to interest and principal payments. The non-amortising Cash Reserve has been increased to EUR 166.40 from EUR 80.80 million through proceeds from a subordinated loan. No other changes have been made to the priority of payments.

As of 25 January 2016, the overall portfolio consisted of 31,560 loans extended to 27,791 borrowers with an aggregate par balance of EUR 3,461.55 million. The portfolio also contained EUR 14.16 million (0.4%) of loans in arrears between 30 and 56 days and EUR 298.09 million (8.6%) of loans in arrears by less than 30 days. Considering that the collections from the Initial Portfolio between 25 January 2016 to 31 January 2016 have been used to pay down the Class A–2014 Notes on the 25 February 2016 payment date, the principal outstanding balance of the portfolio backing the notes as of 26 February 2016 is equal to EUR 3,453.01 million.

The ratings of the Rated 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 toward Building & Development, which represents 53.8% of the portfolio. Such concentration is higher when compared with the Originator’s book and the average of the Italian banking system. DBRS believes that the risk stemming from the concentration is captured by the agency’s default assumptions at the “A” scenario (69.01%). 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 has showed better default performance compared with the Construction sector in Italy.
-- The portfolio has a short weighted-average life (WAL) of approximately four years, but the servicer permitted variations allow relevant increases of the loans’ maturity (up to 30 years for 15.0% of the portfolio). To account for such extensions, DBRS has estimated a portfolio WAL equal to 6.20 years.
-- The portfolio benefits from a high portion of secured loans (55.1% of the portfolio as per DBRS definition) with low loan-to-values (LTV; the weighted average portfolio LTV is 46.8%).
-- The portfolio is very granular. The exposure to the largest one, ten and 20 borrowers represents 0.5%, 4.2% and 6.6% of the portfolio, respectively. The portfolio’s geographical concentration reflects BP’s presence in the wealthy northern Italian regions.
-- DBRS has taken into account in its default assumptions that the securitised portfolio shows relevant positive selection compared with the total book of SME loans of the Originator.

-- The priority of payments, which ensure that all excess spread is used to amortise the Rated Notes before junior payments are made; however, the lack of a trigger based on transaction performance to defer Class B Notes interests (which rank senior to principal payments on the Class A Notes) limits the positive impact of such trapping mechanism on the ratings on the Class A Notes.

--The combination of the lack of a trigger to defer Class B Notes interest and the long recovery lag assumed for recoveries coming from secured loans makes the ratings on Class A Notes more susceptible to sudden upward shifts of Euribor rate. This structural weakness is exposed in the DBRS cash flow model as the Class A Notes would fail to achieve A (sf) in the three scenarios that stress Euribor rate increases, out of the nine scenarios tested. However, this risk would only materialised if the Euribor interest rates increased significantly over the next 2 years, a scenario that we think is highly unlikely.

-- BP will act as Servicer and Securitisation Services S.p.A. will be the Backup Servicer Facilitator. DBRS views the B (low) rating trigger for the appointment of a generic Backup Servicer as a weakness. To account for the lack of adequate mitigants to the commingling risk, a loss has been factored into the rating analysis.

-- The exposure to interest rate risk. The interest payable on the Rated Notes is floored at zero. DBRS has also factored in an adjustment to account for basis and repricing risk.

-- The absence of mechanisms to address set-off risk. The exposure to set-off risk, as calculated by DBRS, is lower than the Italian average but includes the largest exposure (48% of total set-off risk exposure) because of derivative contracts (which do not benefit from crystallisation as of the publication date of the transfer of the relevant loan in the Official Gazette).

-- The credit enhancement for the Class A Notes and B Notes is 39.75% and 31.92%, respectively.

DBRS determined the ratings on the Rated 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 and taking into account positive selection, was computed to be 5.98%.
-- The assumed WAL of the portfolio was 6.20 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 for Italy, the security level and the type of collateral. Recovery rates of 75.88% and 16.20% were used for the secured and unsecured loans, respectively, at the A (sf) rating level, 79.77% and 16.95% respectively at the BBB (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).

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 Banco Popolare Società Cooperativa, the arranger and the Originator.

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

DBRS was supplied with third-party assessments carried out on the Initial Portfolio only. 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 than the standard of 90 days past due definition used by DBRS. Additional dynamic arrears data were provided by the Originator 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.

The last rating actions on this transaction concerning the Class A–2014 and Class B–2014 Notes took place on 19 February 2016 when DBRS removed the ratings from Under Review with Negative Implications following publication of updates to its “Legal Criteria for European Structured Finance Transaction” methodology. The lead responsibilities concerning today’s rating actions on the Class A–2014 and Class B–2014 Notes have been transferred to Marcello Bonassoli.

The ratings on the Series A2–2016 and Series B2–2016 Notes concern newly issued financial instruments. These are the first DBRS ratings on these financial instruments.

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):

-- PD rates used: base-case PD of 5.98%, a 10% and 20% increase on the base-case PD.
-- Recovery rates used: base-case recovery rates of 49.08% and 51.55%, respectively, at A (sf) and BBB (high) (sf) stress levels and a 10% and 20% decrease in the respective base-case recovery rate. Please 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 BBB (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 Class A Notes to BBB (high) (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 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 Class B Notes to 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–2014 Notes
Initial Lead Analyst: Marcello Bonassoli
Initial Rating Date: 30 June 2014
Initial Rating Committee Chair: Jerry van Koolbergen, MD U.S. & European Structured Credit

Lead Surveillance Analyst: Marcello Bonassoli
Most Recent Rating Update: 26 February 2016
Rating Committee Chair: Carlos Silva, SVP European Structured Credit

Class B–2014 Notes
Initial Lead Analyst: Marcello Bonassoli
Initial Rating Date: 30 June 2014
Initial Rating Committee Chair: Jerry van Koolbergen, MD U.S. & European Structured Credit

Lead Surveillance Analyst: Marcello Bonassoli
Most Recent Rating Update: 26 February 2016
Rating Committee Chair: Carlos Silva, SVP European Structured Credit

Series A2–2016 Notes
Initial Lead Analyst: Marcello Bonassoli
Initial Rating Date: 26 February 2016
Initial Rating Committee Chair: Carlos Silva, SVP European Structured Credit

Series B2–2016 Notes
Initial Lead Analyst: Marcello Bonassoli
Initial Rating Date: 26 February 2016
Initial Rating Committee Chair: Carlos Silva, SVP European Structured Credit

DBRS Ratings Limited
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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
-- Operational Risk Assessment for European Structured Finance Originators
-- 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