DBRS Assigns Provisional Ratings to SME Grecale 2017 S.r.l.

DBRS Ratings Limited (DBRS) assigned provisional ratings to the following Notes to be issued by SME Grecale 2017 S.r.l (the Issuer):

-- EUR 508,220,000 Class A at AA (high) (sf).
-- EUR 77,000,000 Series B at BBB (high) (sf).

The Issuer is also expected to issue EUR 184,816,000 Class J Asset-Backed Floating-Rate Notes, which have not been rated by DBRS.

The transaction 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, granted by Unipol Banca S.p.A (Unipol or the Originator). As of 18 September 2017, the transaction’s transferred portfolio included 6,729 loans to 5,862 obligors, totalling EUR 767.68 million. The economic effect of the transfer of the portfolio from the Originator to the Issuer took place on 18 September 2017 (the Effective Date).

In a pre-enforcement scenario, the structure allows for interest on the Class B Notes to be paid before the principal of the Class A Notes but incorporates a trigger on the performance of the portfolio to defer these interest payments after the principal payments of the Class A Notes. The Class A and Class B Notes are referred to as the Rated Notes.

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date, whereas 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, according to the transaction documents.

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 ratings are based on DBRS’s review of the following analytical considerations:
-- The transaction’s capital structure and the form and sufficiency of available credit enhancement. The Class A Notes benefit from 10.0% subordination of the Class B Notes, 24.0% subordination of the Class J Notes and the 3.0% (over the Rated Notes) Cash Reserve, which is available to cover senior fees and interest on the Class A Notes. The Cash Reserve target will amortise subject to the target levels and performance triggers. The Class A Notes will benefit from full sequential amortisation where principal on the Class B Notes will not be paid until the Class A Notes have been redeemed in full.
-- DBRS was provided with the transferred portfolio equal to EUR 767.68 million. The main characteristics of the portfolio include (1) non-mortgage loans represent 40.6% of the portfolio and mortgage loans represent 61.60%; (2) the top three geographical concentration areas are Emilia Romagna (26.3%), Lombardy (14.7%) and Lazio (14.3%); (3) as per DBRS’s industry classification, the portfolio exhibits a relevant concentration in Building & Development, which represents 32.5% of the portfolio; (4) the weighted-average (WA) margin of floating loans is 2.4% and the WA fixed coupon is 4.1%; and (5) the portfolio does not present relevant borrower concentration; however, each of the six first borrowers represent more than 1.0% of the portfolio.

DBRS determined these ratings as follows, as per the principal methodology specified below:
-- The probability of default for the portfolio was determined using the historical performance information supplied. DBRS assumed an annualised probability of default (PD) of 4.47% based on a PD of 5.88%, 2.27% and 6.70% for mortgage, non-mortgage and for non-business company loans, respectively.
--The assumed weighted-average life (WAL) of the portfolio was 6.04 years.
-- The PDs and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the target ratings.
-- The recovery rate was determined by considering the market value declines for Europe, the security level and type of the collateral. Recovery rates of 58.56% and 15.75% were used for the secured and unsecured loans, respectively, at the AA (high) (sf) rating level, and 69.42% and 17.00% at the BBB (high) (sf) rating level, respectively.
-- 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 Unipol Banca S.p.A. and JP Morgan Securities Services plc.

DBRS did 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 considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

This rating concerns a newly issued financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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 Used: Base Case PD of 4.47%, a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 39.65% at the AA (high) (sf) and 46.39% at the BBB (high) stress levels, a 10% and 20% decrease in the Base Case Recovery Rate, respectively. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

For the Class A Notes, DBRS concludes that a hypothetical increase of the Base Case PD by 20% would lead to a downgrade of the Class A Notes to AA (low) (sf) and a downgrade of the Class B Notes to BB (high). A hypothetical decrease of the Base Case Recovery Rate by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf) and a downgrade of the Class B Notes to BBB (low) (sf). 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 downgrade of Class A Notes to A (high) (sf) and a downgrade of the Class B Notes to BBB (low) (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 and US regulations only.

Lead Analyst: María López, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 24 October 2017

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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
-- Derivative 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 analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.