DBRS Assigns Ratings to Credico Finance 16 S.r.l.

DBRS Ratings Limited (DBRS) has today assigned a rating of AA (low) (sf) to EUR 561,700,000 of Class A Notes issued by Credico Finance 16 S.r.l. (the Issuer).

The rating of the Class A Notes addresses timely payment of interest and ultimate payment of principal on or before the legal final maturity date.

The Issuer is a limited liability company incorporated in 2016 under the laws of the Republic of Italy.

The Class A Notes are backed by first lien residential mortgage loans originated in Italy by 16 Italian Cooperative Banks (the BCCs or Originators).

This is the fifteenth multi-originator transaction originated by the Italian Cooperative Banks belonging to ICCREA’s network and the fourth Residential Mortgage Backed Securities (RMBS) transaction rated by DBRS. DBRS also assigned ratings to two other transactions collateralised by loans to small and medium-sized enterprises within the series. Twelve out of 16 Originators have already sold loans to one or more previous Credico Finance special-purpose vehicles.

The originator and servicer of the transaction are the BCCs. The back-up servicer is ICCREA Banca S.p.a. The Agent Bank, Transaction Bank and Principal Paying Agent is BNP Paribas Securities Services SA, Milan branch. The DBRS private ratings of the Agent Bank comply with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology, given the AA (low) (sf) rating assigned to the Class A Notes.

As of the transfer date (7 September 2016), the balance of the mortgage portfolio sold to the Issuer is approximately EUR 661.5 million, including the accrued interest (Initial Portfolio). The notes are backed by a portfolio of mostly first lien loans (99.84%, for further details, please refer to the rating report). The portfolio has an unindexed weighted-average current loan-to-value (WACLTV) of 52.55% and an unindexed weighted-average original loan-to-value (WAOLTV) of 64.23% (both calculated utilizing the original unindexed properties value). Approximately 0.25% of the current balance has a CLTV higher than 100%. The loans in the transaction are granted to Bank of Italy SAE code 600 for individuals, 614 for artisan and 615 for small commercial borrowers.

The portfolio interest rate is primarily linked to three-months Euribor (45.75%) and six-months Euribor (44.15%). Additionally, the portfolio has exposure to fixed rate (6.37%), ECB rates (2.12%) and a residual exposure to other indices (1.08%) and the one-month Euribor (0.53%). The portfolio includes loans with interest rate cap (2.98%), modular loans (2.66%) and loans with the option to switch the interest rate from fixed to floating, and vice versa, at a predefined date (1.31%).

Credit enhancement for the Class A Notes is calculated as 15.00%, provided by the subordination of the sixteen Class B Notes (from B1 to B16) collateralised by the mortgage portfolio. The Class A Notes pay quarterly interest in arrears equal to three-month Euribor plus a margin of 30 basis points. Initially, there will be sixteen combined (principal and interest) waterfalls (one for each portfolio, originator and servicer) where each portfolio will support a portion of the Class A Notes on the basis of the contribution to the aggregate of sixteen portfolios. Upon the breach of certain conditions (cross-collateral events; see Credico Finance 16 S.r.l. rating report for further details), the sixteen separate waterfalls will collapse into a unique combined waterfall.

The cash reserve has been funded through sixteen limited recourse loans for a total amount of EUR 22,468,000 (4.00% of the initial balance of the Class A Notes) and can amortise during the life of the transaction to 4.00% of the current outstanding of the Class A Notes from the second payment date, with a floor at 3.00% of the initial balance of the Class A Notes. Each cash reserve is available to pay the senior fees and the interest on the portion of Class A Notes related to the single portfolio and to cover principal shortfall up to 80% of the target amount of the cash reserve. Additionally, each cash reserve can be utilised to support the payment of the senior fees and the interest on Class A Notes for the other waterfalls. Upon the breach of certain conditions (cross-collateral events), the sixteen cash reserve will be commingled in the unique combined waterfall.

The servicing agreement allows loans to be renegotiated. The renegotiations can be related to spread/interest rate reduction, renegotiation to fixed or floating loans, or both capital and interest payment holidays. DBRS has modelled the possible impact of these renegotiations in its cash flow analysis based on the limits included in the transaction documents.

For further details on the analysis, please refer to the rating report available on www.dbrs.com.

The ratings are based upon DBRS review of the following analytical considerations:

-- Transaction capital structure and form and sufficiency of available credit enhancement.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to terms in which they have invested.

-- The transaction parties’ capabilities with respect to originations, underwriting, servicing and financial strength.

-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and the consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

-- Incorporation of a sovereign-related stress component in the stress scenarios due to the rating assigned by DBRS to the Republic of Italy of A (low), Under Review with Negative Implications.

As part of its analysis, DBRS has investigated the sensitivity of the transaction base case default and recovery assumptions to a potential downgrade of the Italian sovereign rating. DBRS has concluded that a potential downgrade of the Republic of Italy sovereign rating, as envisaged in the sovereign rating action taken on 5 August 2016 (please see DBRS press releases, “DBRS Places Italy A (low) Under Review with Negative Implications on Heightened Risks” (August 5, 2016) and “DBRS Extends Review of Italy’s Ratings until After December Referendum” (November 3, 2016), would not in itself affect the ratings assigned to the Class A Notes.

As a result of these analytical considerations, DBRS derived a Base Case probability of default (PD) of 11.89% and loss given default (LGD) of 11.28%, which resulted in an expected loss (EL) of 1.34% using the European RMBS Credit Model. DBRS cash flow model assumptions stress the timing of defaults and recoveries, prepayment speeds and interest rates. Based on a combination of these assumptions, a total of 16 cash flow scenarios were applied to test the capital structure and ratings of the notes. The cash flows were analysed using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda.

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 these ratings include working papers and data on the Italian economy and housing market provided by the European Central Bank, Eurostat, Bank of Italy and Istituto Nazionale di Statistica (ISTAT). DBRS reviewed the origination and servicing practices of Banco Cooperativo Emilano – Credito Cooperativo (BCC Emiliano) Banca di Credito Cooperativo di Treviglio (BCC Treviglio) Banca del Centroveneto Credit Cooperativo (Centroveneto) Banca della Marca Credito Cooperativo (Marca) Mantovabanca 1896 Credito Cooperativo (Mantovabanca) Centromarca Banca – Credito Cooperativo (Centromarca) in July 2016 that cumulative contribute approximately 61.6% of the current Portoflio balance. The Originators provided loan-level data, historical performance of the mortgage portfolio and the Portfolio’s payment history dating back to 2008.

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

DBRS has been supplied with third-party assessments. However, this did not impact the rating analysis.

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.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

These ratings were disclosed to ICCREA Banca S.p.a. and Advisory & Finance SA as arrangers of the Originators.

This rating concern a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

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

To assess the impact of a change in the transaction parameters (probability of defaults and/or loss given default) on the rating of Class A Notes, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- In respect of the Class A Notes and a rating category of AA (low) (sf), the PD of 31.98%, a 25% and 50% increase on the PD.
-- In respect of the Class A Notes and a rating category of AA (low) (sf), LGD of 27.94%, a 25% and 50% increase on the LGD.

DBRS concludes that for the Class A Notes:
-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to downgrade the Class A Notes to BBB (high) (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (low) (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: Davide Nesa, Senior Financial Analyst
Initial Rating Date: 14 November 2016
Initial Rating Committee Chair: Quincy Tang, Managing Director

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction are listed below:

-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Unified Interest Rate Model for European Securitisations

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

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.

The full 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.