DBRS Confirms Class A and Upgrades Class B of Etruria SPV Following Repurchase of Defaulted Loans

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

-- EUR 35,633,278 Class A Asset-Backed Floating Rate Notes due 2055
(ISIN: IT0004855299): confirmed at AAA (sf).
-- EUR 125,000,000 Class B Asset-Backed Floating Rate Notes due 2055
(ISIN: IT0005157760): upgraded to AA (high) (sf) from BBB (high) (sf).

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.

The rating actions taken on the Class A and Class B Notes follow the recent repurchase of loans classified as “sofferenza” executed on 27 June 2016 and are incorporating in addition the following analytical considerations as explained further below:
--The credit enhancement available to the Class A and Class B Notes to cover the expected losses at AAA (sf) and AA (high) (sf), respectively.
--The portfolio performance in terms of delinquencies and defaults, as of the last payment date on 26 April 2016.
--The lifetime default rates, the recovery rates and expected loss rates assumptions on the collateral pool.

Etruria SPV is a static cash flow securitisation collateralised by a portfolio of secured and unsecured loans granted to small and medium enterprises (SMEs) and self-employed individuals by Banca Etruria Società Cooperativa (BancaEtruria or the Seller) in Italy. The transaction originally closed in October 2012 and was later restructured in January 2016 by splitting the initial junior notes into new mezzanine notes (Class B Notes) and new junior notes (Class C Notes).

Following the recent adoption of the Bank Resolution and Recovery Directive (BRRD) in Italy on 16 November 2015, the Italian government 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).

The resolution plan also provided the transfer of all the loans classified as sofferenza as of the end of September 2015 to a “bad bank”: “REV-Gestione Crediti Societa’ per Azioni” (REV). Loans that were not part of securitisation transactions have been transferred to REV on 1 February 2016, while securitised loans classified as sofferenza as of 30 September 2015 have been repurchased by Nuova BancaEtruria on 27 June 2016 and will be transferred to REV subsequently.

The 304 loans classified as sofferenza qualifying for the repurchase described above have been bought back at their outstanding balance plus any accrued interest, which makes a total repurchase price of EUR 25,043,122. The outstanding principal balance of loans classified as sofferenza remaining in the transaction after the repurchase is equal to EUR 8,744,592.

The repurchase of the non-performing loans has a positive impact on the performance of the transaction given that the price paid significantly exceeds the expected recoveries from these loans. The credit enhancement of the Class A notes and Class B notes has increased from 70.5% and 24.2% as of the last rating action on 7 January 2016 to 90.6% and 43.1%, respectively, following the repurchase.

As of April 2016, the outstanding balance of performing and delinquent loans is EUR 244,058,570 and the outstanding balance of defaulted loans (as per the transaction definition) is EUR 63,363,083. The migration of the portion of portfolio beyond 90 days in arrears continues, with 1.22% of the portfolio outstanding balance in arrears between 90 days and 179 days.

The cumulative defaulted balance as per the transaction definition is 13.1% of the securitised balance in July 2012 and after the repurchase is down to 9.2%

DBRS updated its assumptions on the portfolio to account for the portfolio migration as per the principal methodology specified below:
-- The annualised probability of default (PD) for the Seller, was increased from 8.08% to 8.10% to account for the increase of the portion of secured loans.
-- The assumed weighted-average life (WAL) of the Portfolio has decreased from 5.48 years to 5.37 years and is a result of the decrease in the performing portfolio balance as per DBRS assumptions.
-- 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 69.40% and 12.99% were used for the secured and unsecured loans respectively at the AAA (sf) rating level, 71.71% and 15.15% respectively at the AA (high) (sf) level. In addition, DBRS applied an unsecured recovery rate of 12.99% and 15.15% at AAA (sf) and AA (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. DBRS has reviewed the repurchase agreement documentation executed on 27 June 2016. A review of any other 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 commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include legal documentation and information received from the legal counsel to Nuova BancaEtruria, servicer reports provided by Nuova BancaEtruria and loan by loan 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 7 January 2016, when DBRS assigned a final rating of BBB (high) (sf) to the newly issued Class B Notes and upgraded the existing Class A Notes to AAA (sf) from AA (low) (sf).

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of the 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 8.10%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case Recovery Rates of 69.40% and 71.71% respectively at AAA (sf) and AA (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%, or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would each lead to a downgrade of the Class B Notes to AA (low) (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 to AA (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, Senior Vice President
Initial Rating Date: 10 October 2012
Initial Rating Committee Chair: Jerry van Koolbergen, Managing Director

Class B Notes
Initial Lead Analyst: Natalia Coman, Senior Financial Analyst
Initial Rating Date: 7 January 2016
Initial Rating Committee Chair: Carlos Silva, Senior Vice President

Lead Surveillance Analyst: Natalia Coman, Senior Financial Analyst
Rating Committee Chair: Carlos Silva, Senior Vice President

DBRS Ratings Limited
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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 analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375