DBRS Upgrades Creso 2 S.r.l.’s Class A Notes Rating and Removes UR-Positive

DBRS Ratings Limited (DBRS) has today upgraded the rating on the Class A notes issued by Creso 2 S.r.l. (the Issuer) to A (high) (sf) from A (sf) and has removed the Under Review with Positive Implications (UR-Pos) designation.

Creso 2 S.r.l. is a securitisation of a portfolio of Italian residential mortgage loans originated and serviced by Cassa di Risparmio della Provincia di Chieti S.p.a. (Carichieti). The transaction follows the standard structure under the Italian Securitisation Law and closed in August 2012.

The Class A notes rating was placed UR-Pos following a material update to the methodology DBRS applies to monitor the counterparty risks of the transaction (see “Legal Criteria for European Structured Finance Transactions,” published on 19 February 2016).

The rating action reflects the following analytical considerations:
-- Updated and more granular rating levels introduced by the “Legal Criteria for European Structured Finance Transactions” for account bank institution replacement triggers.
-- Portfolio performance, in terms of delinquencies and defaults, as of the December 2015.
-- Updated portfolio default rate, loss given default (LGD) and expected loss assumptions for the remaining collateral pool.
-- Incorporation of a sovereign-related stress component to address the impact of macroeconomic variables on collateral performance given the long-term foreign and local currency rating of A (low) for the Republic of Italy.
-- Current available credit enhancement for the Class A notes to cover the expected losses at the A (high) (sf) rating level.
-- Transfer of servicing duties from Cassa di Risparmio della Provincia di Chieti S.p.A. (Carichieti) to Nuova Cassa di Risparmio di Chieti S.p.A. (Nuova Carichieti or the Servicer).

Following the recent adoption of the Bank Resolution and Recovery Directive in Italy on 16 November 2015, the Italian government passed a law decree on 22 November 2015 providing for the liquidation of Carichieti 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 Creso 2 S.r.l.) to a new bank, namely Nuova Cassa di Risparmio di Chieti S.p.A. The main concern surrounding the transaction was the risk that a disorderly and abrupt liquidation of Carichieti (for which updated financial information was not available) could have impaired its capabilities to adequately service the securitised portfolio. However in DBRS opinion the transfer of the servicing duties from the Carichieti to Nuova Carichieti removes the main uncertainty surrounding the continuity and effectiveness of its activity as Servicer for the transaction.

The mortgage pool is well seasoned (more than seven years) and it is geographically concentrated in the Abruzzo region in central Italy. In addition to the concentration risk, the transaction is also exposed to seismic risk. As a result, DBRS increased the Italian benchmark market value decline assumptions to accommodate for these specific risk elements of the portfolio.

The portfolio is performing in line with DBRS’s expectations. The 90+ delinquency ratio (excluding defaulted loans) as a percentage of the performing balance of the portfolio has increased to 2.72% in December 2015. The gross cumulative default ratio (including repurchased defaulted loans) has steadily increased to 2.98% since closing.

The Class A notes are supported by subordination of the Class B notes and excess spread. The credit enhancement for the Class A notes increased to 51.65% as of the December 2015 payment date from 41.96% as of the December 2014 payment date as a result of the amortisation of the Class A notes.

An amortising reserve fund of EUR 13.15 million was set up at the closing of the transaction by a subordinated loan. The reserve fund covers interest shortfall on the Class A notes and items senior thereto. The reserve fund can also serve as credit enhancement when the Class A notes are fully redeemed or at final legal maturity. The reserve fund is currently at the target level of EUR 8.856 million.

The securitised mortgage portfolio includes five securitised borrowers which hold subordinated bonds issued by Carichieti, which have been written off in the context of its resolution and the transfer of certain assets and liabilities to Nuova Carichieti. At this stage it is still uncertain if and to what extent the holders of written off debt could be entitled to set off such exposures against loans now held by Nuova Carichieti. However the exposure to such subordinated bonds is extremely limited, representing 0.04% of the outstanding portfolio.

The Bank of New York Mellon (Luxembourg) S.A.’s (BNY Mellon Luxembourg) Italian branch is the Transaction Bank for this transaction. The “AA (low)” DBRS public rating of BNY Mellon Luxembourg’s Italian branch is at least equal to the Minimum Institution Rating given the rating assigned to the Class A notes, as described in the DBRS “Legal Criteria for European Structured Finance”.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the “Master European Structured Finance Surveillance Methodology”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology. A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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 information provided by Zenit Serivce S.p.A., Nuova Carichieti and data from the European DataWarehouse GmbH.

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

DBRS was not 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 took place on 19 February 2016, when DBRS placed the rating on the Class A notes Under Review with Positive Implications.

The lead responsibilities for this transaction have been transferred to Antonio Di Marco.

Information regarding DBRS ratings, including definitions, policies and methodologies is available at www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):
-- DBRS expected a lifetime base-case probability of default (PD) and LGD for the pool based on a review of the current receivables. Adverse changes to asset performance may cause stresses to base-case assumptions and therefore have a negative effect on credit ratings.
-- The base-case PD and LGD of the current pool of mortgages for the Issuer are 10.83% and 20.90%, respectively. At the A (high) (sf) rating level, the corresponding PD is 28.32% and the LGD is 53.52%.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base-case assumption. For example, if the LGD increases by 50%, the rating on the Class A notes would be expected to remain at A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A notes would be expected to remain at A (high) (sf), assuming no change in the LGD. Furthermore, if both PD and LGD increase by 50%, the rating on the Class A notes would be expected to remain at A (high) (sf).

Class A notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (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: Konstantine Pastras
Initial Rating Date: 2 August 2012
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Antonio Di Marco
Rating Committee Chair: Mary Jane Potthoff

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The rating methodologies and criteria used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions (February 2016)
-- Master European Structured Finance Surveillance Methodology (December 2015)
-- Operational Risk Assessment for European Structured Finance Servicers (December 2015)
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (January 2016)
-- Unified Interest Rate Model for European Securitisations (October 2015)

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.