DBRS Assigns Provisional Ratings to Voba N.6 S.r.l.

DBRS Ratings Limited (DBRS) has today assigned the following provisional ratings to the notes to be issued by Voba N.6 S.r.l. (the Issuer):

-- EUR 100,000,000 Class A1 Asset Backed Floating Rate Notes rated AAA (sf)
-- EUR 257,400,000 Class A2 Asset Backed Floating Rate Notes rated AA (sf)
-- EUR 59,600,000 Class B Asset Backed Floating Rate Notes rated BBB (high) (sf)

The Issuer is also expected to issue EUR 124,545,000 Class J Asset Backed Floating Rate Notes, which have not been rated by DBRS.

Voba N.6 S.r.l. is a cash flow securitisation collateralised by a portfolio of performing mortgage and non-mortgage loans to Italian small- and medium-sized enterprises, entrepreneurs, artisans and producer families. The loans were mainly granted by Banca Popolare dell’Alto Adige S.C.p.A. (BPAA or the Originator), but also by Banca Popolare di Marostica S.C.p.a.r.l. (BPM, 12.2% of the portfolio) and Banca di Treviso S.p.A. (Banca di Treviso, 0.9% of the portfolio) before being merged into BPAA in 2015.

In a pre-enforcement scenario, the Class A1 and Class A2 Notes (Senior Notes) are pro rata and pari passu with respect to interest payments, while the Class A1 Notes rank senior to Class A2 Notes with respect to principal payments. The structure allows for interest on the Class B Notes to be paid before the principal of the Senior Notes, but incorporates a trigger on the performance of the portfolio to defer these interest payments after the principal payments of the Senior Notes. In a post-enforcement scenario, Class A1 and Class A2 Notes are pari passu and pro rata with respect to both principal and interest payments. The Class A1, Class A2 and Class B Notes are referred to as the Rated Notes.

The ratings on the Class A1 and Class A2 Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date, while the rating on the Class B Notes addresses the ultimate payment of interest and ultimate payment of principal on or before the Final Maturity Date. Final ratings will be assigned upon execution of transaction documents and issuance of the notes. To the extent that the documents and information provided as of this date differ from the executed versions of the governing transaction documents, DBRS may assign lower final ratings to the Rated Notes, or may avoid assigning final ratings to the Rated Notes altogether.

The economic effect of the transfer of the portfolio from the Originator to the Issuer took place on 31 July 2016 (the Effective Date). As of the Effective Date, the portfolio consisted of 4,132 loans extended to 3,782 borrowers, with an aggregate par balance of EUR 528.61 million. As of 31 August 2016, the portfolio contained EUR 14.45 million of loans in arrears by no more than 61 days (2.73% of the initial portfolio), of which EUR 12.43 million by less than 31 days.

The ratings of the Class A1, Class A2 and Class B Notes are based upon DBRS’s review of the following items:

(1) The portfolio characteristics:

-- The portfolio benefits from a short weighted-average life (WAL) of 4.13 years compared to other Italian SME CLO portfolios.

-- The portfolio’s geographical concentration reflects BPAA’s presence in the regions of Trentino Alto Adige and Veneto. In particular, the pool is concentrated in the Trentino Alto Adige region (51.9% of the portfolio), which is one of the wealthiest areas in the European Union.

-- As per DBRS’s industry classification, the portfolio exhibits a relevant concentration in Building & Development, which represents 26.5% of the portfolio. However, such concentration is in line with the Originator’s book, as well as the average of the Italian banking system.

-- The portfolio shows some borrower concentration, with the largest one, five and ten borrowers representing 2.5%, 7.3% and 10.9% of the portfolio, respectively. Aside from the largest borrower, the transaction is relatively granular. Therefore, DBRS accounted for the large exposure of the portfolio to the top borrower by applying to it a 22.72% base case annual probability of default (PD).

-- Despite the portfolio being equally split between mortgage and non-mortgage loans, DBRS’s expectations in terms of recoveries are low due to the presence of collateral types that the agency considers unsecured (6.8% of the portfolio) as well as the presence of second-ranking loans (11.8%). In addition, real estate properties securing loans with a financed amount lower than EUR 400,000 might not have been evaluated via full appraisals.

(2) DBRS did not receive any historical performance data that covered the loans originated by BPM and Banca di Treviso. DBRS assigned an 8% base case annual PD to loans originated by BPM and Banca di Treviso, the highest base case PD observed for Italian originators over the universe of DBRS-rated Italian SME CLOs.

(3) The effective deferral trigger on Class B interest (cumulative default above 14% of the initial portfolio), which is expected to limit the leakage of excess spread available to redeem the Class A1 and Class A2 Notes. Aside from senior costs and interest payments, all excess spread is expected to be used to pay down the Rated Notes. Interest and principal payments on the Notes will be made quarterly.

(4) The exposure to interest rate risk, which is expected to be mitigated by presence of a 3% (per annum) cap on the Class A1 Notes coupon and of a 5% (per annum) cap on the Class A2 and Class B Notes coupons. The interest payable on Rated Notes is also floored at zero. DBRS has also factored an adjustment to account for basis and repricing risk.

(5) The Cash Reserve (CR), which is expected to be amortising and maintained at 3% of the balance of the Rated Notes (initial balance equal to EUR 12.00 million), with a floor of EUR 2.00 million. The CR is expected to be available to cover shortfalls of senior fees and interests on the Rated Notes as well as principal shortfalls at the Final Maturity Date.

(6) BPAA will act as the Servicer. Securitisation Services S.p.A. is expected to be appointed as Backup Servicer, which DBRS considers insufficient to mitigate commingling risk. DBRS has modelled a loss in its cash flow model to cover for commingling risk.

(7) The absence of mechanisms to address set-off risk.

(8) The credit enhancement for the Class A1, Class A2 and Class B Notes expected to be 83.35%, 34.66% and 23.38%, respectively.

(9) The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting and servicing practices.

(10) The soundness of the legal structure and the presence of legal opinions that 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 Rated Notes as follows, as per the principal methodology specified below:
-- The annualised WA PD for the securitised portfolio was computed to be 4.32%, based on a PD of 3.93% and 2.48% for mortgage and non-mortgage loans originated by BPAA, respectively, 8% for loans originated by BPM and Banca di Treviso and 22.72% for the largest borrower.
-- The assumed WAL of the portfolio was 4.26 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 46.49% and 13.50% were used for the secured and unsecured loans, respectively, at the AAA (sf) rating level, 55.51% and 15.75% at the AA (sf) rating level, 71.67% and 17.00% at the BBB (high) (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 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.

These 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 the Arranger, Unicredit Bank AG, London Branch, and the Originator, Banca Popolare dell’Alto Adige S.C.p.a.

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 received historical performance data for BPAA. 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 180 days past due definition used by DBRS for Italy. Additional dynamic arrears data were provided by the Originator to determine a conservative average annual default rate. Arrears data provided covered four years and one quarter of BPAA history, which is less than what is expected as per the methodology Rating CLOs Backed by Loans to European SMEs. Therefore, DBRS took a conservative adjustment on the calculations that the agency usually applies on delinquency data to derive its base case PD assumptions. Historical performance data (static or dynamic) were not available for BDM and Banca di Treviso. Due to the lack of data, DBRS assigned conservatively to this portion of the portfolio, the highest base case PD observed for Italian originators over its universe of rated Italian SME CLOs.

Despite the above, DBRS considers the information available to it for the purposes of providing these ratings to be 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.

These ratings concern newly issued financial instruments.

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

To assess the impact of the changing of the transaction parameters on the ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- PD Used: Base Case PD of 4.32%, a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 26.39% at the AAA (sf), 31.28% at the AA (sf) and 38.36% at the BBB (high) stress levels, 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 Base Case Recovery Rate by 20%, ceteris paribus, would each lead to: a confirmation of the Class A1 Notes at AAA (sf), a downgrade of the Class A2 Notes and Class B Notes to A (high) (sf) and BBB (low) (sf), respectively. A scenario combining both an increase in the Base Case PD by 10% and a decrease in the Base Case Recovery Rate by 10% would lead to: a confirmation of Class A1 at AAA (sf), a downgrade of the Class A2 Notes and Class B Notes to A (sf) and BB (high) (sf), respectively.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (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, Assistant Vice President
Initial Rating Date: 22 September 2016
Initial 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 SMEs
-- 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
-- Rating CLOs and CDOs of Large Corporate Credit
-- 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

The presale report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.