DBRS Downgrades Civitas SPV S.r.l.’s Series 2012-2-A Notes to A (high) (sf) Following Transaction Restructuring

DBRS Ratings Limited (DBRS) has today downgraded the Series 2012-2-A notes (ISIN: IT0004842545) issued by Civitas SPV S.r.l. (SME) (the Issuer or Civitas SME) to A (high) (sf) from AA (sf), following the transaction restructuring.

Following the amendment, the balance of the Series 2012-2-A notes is equal to EUR 268.65 million and the balance of the Series 2012-2-B notes is equal to EUR 145.00 million.

The rating on the Series 2012-2-A notes addresses the timely payment of interest and ultimate payment of principal payable on or before the Final Maturity Date in October 2055.

Civitas SME is the first SME CLO originated by Banca di Cividale SpA, later merged with Banca Popolare di Cividale ScpA (the Originator or BP Cividale). The transaction originally closed on 1 August 2012 and the securitised portfolio consists of secured and unsecured loans to Italian small- and medium-sized enterprises (SMEs), entrepreneurs, artisans and producer families.

The original capital structure consisted of EUR 273,000,000 of Series 2012-2-A notes and EUR 144,700,000 of Series 2012-2-B notes backed by a EUR 410.74 million portfolio (Initial Portfolio). Following the amendments that became effective on 25 October 2016, the Issuer acquired a Further Portfolio of performing loans (EUR 236.71 million) from BP Cividale. Additionally, the Originator repurchased the defaulted loans, as per the transaction definition, which have not been classified as “sofferenza” yet, for a total repurchase price of EUR 28.05 million.

Following the 25 October payment date, the pre-restructuring balance of the Series 2012-2-A notes was EUR 60.42 million. The principal balance of the Initial Portfolio as of 15 October 2016 was EUR 165.87 million (excluding loans classified as “sofferenza”).

To finance the purchase of the Further Portfolio (which also includes EUR 529,491 of accrued interest and EUR 22,174 of unpaid interest) and the increase of the Cash Reserve (to EUR 6.72 million from EUR 1.81 million) on 25 October 2016 (after payments on the existing notes described above), Civitas SME has increased the principal balance of the Series 2012-2-A and Series-2012-2-B notes by an aggregate amount of EUR 208.54 million. The remaining portion of the purchase price of the Further Portfolio has been paid through the proceeds of the sale of the defaulted loans and the release of the Clawback Amount (EUR 5.07 million). The Clawback Amount was a mechanism designed to cover the Issuer from the risk that prepayments made by securitised debtors could be clawed back by the bankruptcy receiver of the borrower if made within two years of bankruptcy (as per Article 65 of the Italian bankruptcy law), by trapping such prepayments into the Issuer accounts for up to two years. Changes made to the Italian securitisation law in December 2013 explicitly exclude the application of Article 65 on prepayments made by securitised debtors.

The existing and new notes of each class are fungible and considered as a single class (they have the same ISIN) and therefore any reference found in the documents to the notes after the restructuring is intended to also apply to the increased balance.

As of 15 October 2016, the overall portfolio consisted of 3,372 loans extended to 2,780 borrowers with an aggregate principal balance of EUR 402.03 million (which excludes EUR 28.43 million of loans classified as “sofferenza”). Loans in arrears between 30 days and 90 days represented 0.40% of the outstanding principal balance of the portfolio, while delinquencies greater than 90 days were 1.72%. Principal collections received on the Initial Portfolio from 30 September until 15 October (EUR 1.01 million) will form part of the Issuer available funds on the next payment date falling in January 2017.

The above-mentioned rating action is based on the following analytical considerations:

CURRENT PERFORMANCE AND PORTFOLIO CHARACTERISTICS
-- As of the end of the last Collection Period (30 September 2016), the transaction’s gross cumulative defaults stood at 16.86% of the Initial Portfolio balance, one of the highest default levels on Italian SME CLOs rated by DBRS. Additionally, the top borrowers’ internal rating probability of default (PD) is higher than the pool average.
-- The portfolio has a high portion of Mortgage Loans (80.89%), which carry a higher PD, as evidenced both by the historical data provided and by the past performance of the Initial Portfolio.
-- The portfolio is relatively granular, with an average loan balance of EUR 119,225 and a low borrower concentration – only two borrowers have an exposure representing 1.00% or more of the portfolio and the top ten borrowers represent 8.81% of the pool.
-- The portfolio is mainly concentrated in the Friuli Venezia-Giulia and Veneto regions, which represent 72.00% and 25.43% of the pool, respectively. Overall, the portfolio geographical distribution reflects BP Cividale’s presence in Northeast Italy.
-- As per DBRS’s industry classification, the portfolio exhibits a high concentration towards the Building & Development (31.67%) and Farming/Agriculture (20.13%) sectors.
-- The portfolio Weighted-Average Life (WAL) is 5.43 years, but the Servicer permitted variations allow increases of the loans’ maturities. To account for such extensions, DBRS has estimated a portfolio WAL equal to 6.36 years, which was used for the analysis.

TRANSACTION CHARACTERISTICS
-- BP Cividale acts as Servicer and Securitisation Services S.p.A. acts as Backup Servicer Facilitator. The appointment of a Backup Servicer will occur once the Servicer’s appointment has been terminated. To account for the lack of adequate mitigants to the commingling risk, a loss has been factored into the rating analysis.
-- The transaction does not benefit from mechanisms to address the exposure to set-off risk. Therefore, a set-off loss has been sized in the analysis.
-- The priority of payments, which ensures that all excess interest is used to amortise the Series 2012-2-A notes before junior payments are made.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms in which they have invested.
-- The credit enhancement for the Series 2012-2-A notes is 33.96%, which DBRS considers sufficient to cover expected losses assumed in line with an A (high) (sf) rating level. The credit enhancement includes Principal collections received on the Initial Portfolio from 30 September until 15 October and excludes all loans in arrears by more than 90 days and the ones classified as “sofferenza”.
-- The soundness of the legal structure and the presence of legal opinions that address the true sale of the assets to the trust and the non-consolidation of the Issuer, as well as consistency with the DBRS “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS determined the rating of the Series 2012-2-A notes as follows, as per the principal methodology specified below:
-- The Base Case PD for the portfolio, determined using the historical data supplied, was 7.16% for Mortgage Loans and 4.01% for Non-Mortgage Loans. Additionally, for loans in arrears between 30 days and 90 days a CCC (low) rating was assigned (equivalent to an annualised PD of 61.14%), while loans in arrears by more than 90 days have been considered defaulted.
-- 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 Italian commercial and residential real estate properties, the security level and the type of collateral. Weighted-average recovery rates of 52.29% and 16.50% were used for the secured and unsecured loans, respectively, at the A (high) (sf) rating level. Moreover, loans in arrears by more than 90 days have been assumed to be unsecured.
-- The Break-Even Default 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 data provided by BP Cividale via the Arranger FISG S.r.l.

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

DBRS was supplied with third-party assessments on the Further Portfolio in 2016. 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 to the standard of 180 days past due definition used by DBRS for Italian transactions. Additional dynamic arrears data was provided by BP Cividale 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 action on this transaction took place on 1 August 2016, when DBRS upgraded the rating on the Series 2012-2-A notes to AA (sf).

The lead responsibilities for this transaction concerning today’s rating action have been transferred to Marcello Bonassoli.

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 7.16% for Mortgage Loans and 4.01% for Non-Mortgage Loans, a 10% and 20% increase on the Base Case PD.
-- Recovery rates used: Base Case recovery rate of 45.29% at A (high) (sf) stress level and 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 either a hypothetical decrease in the recovery rate by 20%, or a scenario combining both an increase in the Base Case PD by 20% and a decrease in the recovery rate by 10% would lead to a downgrade of the Series 2012-2-A notes to A (low) (sf). Either a scenario combining both an increase in the Base Case PD by 10% and a decrease in the recovery rate by 20%, or a scenario combining both an increase in the Base Case PD by 20% and a decrease in the recovery rate by 20% would lead to a downgrade of the Series 2012-2-A notes to BBB (high) (sf).

For further information on DBRS historic 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: Simon Ross
Initial Rating Date: 1 August 2012
Initial Rating Committee Chair: Jerry van Koolbergen

Lead Surveillance Analyst: Marcello Bonassoli, Assistant Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President, EU Structured Credit

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
-- 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