DBRS Takes Rating Actions on BCC SME Finance 1 S.r.l. Following the Transaction Restructuring

DBRS Ratings Limited (DBRS) took the following rating actions on the outstanding Class A Notes (Class A1 Notes) and on the new Class A Notes (Class A2 Notes and, together with the Class A1 Notes, the Class A Notes) issued by BCC SME Finance 1 S.r.l. (the Issuer, or BCC SME):

-- Class A1 Notes confirmed at AA (sf)
-- Class A2 Notes assigned a new rating of AA (sf)

The rating actions follow an entire review of the transaction in the context of a restructuring that became effective on 6 December 2017 (the Restructuring) and are based on the following analytical considerations:
-- The amendments to the transaction in the context of the Restructuring;
-- The overall portfolio performance as of the November 2017 payment date;
-- Updated portfolio default rate, recovery rate and expected loss assumptions for the remaining collateral pool;
-- The current available credit enhancement (CE) to the Class A Notes to cover the expected losses assumed in line with the AA (sf) rating level; and
-- The sensitivity of Class A Notes to upward shifts of the Euribor rate.

The ratings on the Class A Notes address the timely payment of interest and ultimate payment of principal payable on or before the Final Maturity Date in May 2060.

The Issuer is a securitisation collateralised by a portfolio of secured and unsecured loans granted to Italian small- and medium-sized enterprises (SMEs), entrepreneurs, artisans and producer families. Loans were originally granted by 28 Originators, 27 of which were Italian co-operative banks (BCCs) and also Mediocredito Trentino-Alto Adige S.p.A. – Investitionsbank Trentino-Süditrol A.G. (Mediocredito).

The transaction closed on 10 August 2012 and its structure consisted of EUR 1,533.0 million of Class A Notes (now renamed to Class A1 Notes) and 28 series of Class B Notes with an aggregate balance of EUR 656.7 million (together with Class A1 Notes, the Initial Notes), backed by 28 individual portfolios with an aggregate balance of EUR 2,189.7 million; each Originator subscribed to one series of Class B Notes, which were sized in proportion to that Originator’s portfolio balance. Cross-support between the portfolios was achieved by retaining in a Principal Amortisation Reserve Account proceeds from individual portfolios that would otherwise have been applied towards the amortisation of the Class B Notes.

Following the November 2017 payment date, the balance of the Class A1 Notes was EUR 30.2 million and Class B Notes remained unchanged at EUR 656.7 million.

AMENDMENTS
On 6 December 2017, the following amendments to BCC SME structure became effective:
-- The issuance of EUR 449.9 million Class A2 Notes whose proceeds were applied toward the partial early amortisation of the Class B Notes to a post-restructuring aggregate balance of EUR 205.8 million; after the partial amortisation, the relative size of each series of Class B Notes reflects the remaining balance of each Originator’s portfolio. In cases where the proportion of Class A2 Notes proceeds available to an individual Originator in accordance with its share of the remaining portfolio was lower than the Scheduled Redemption Amount of its series of Class B Notes, amounts from the release of the Principal Amortisation Reserve Account ascribed to that Originator were applied to redeem its series of Class B Notes. Class A2 Notes have the same seniority as Class A1 Notes, ranking pari passu and pro rata with the latter with respect to interest and principal payments and were fully subscribed by each individual Originator in an amount proportional to the relevant individual portfolio;
-- The resizing of the cash reserves to 3.011% of each Originator’s portfolio balance as of 31 October 2017;
-- The release of the amounts deposited into the Principal Amortisation Reserve Accounts;
-- The appointment of BNP Paribas Securities Services S.C.A., Milan branch (BNP Paribas, Milan) as the Transaction Bank, Italian Paying Agent, Cash Manager, Principal Paying Agent and Agent Bank and the appointment of BNP Paribas Securities Services S.C.A, London branch (BNP Paribas, London) as the English Transaction Bank, replacing both Deutsche Bank S.p.A. and Deutsche Bank AG, London branch in their respective roles.

The aggregate excess amount from the issuance of the Class A2 Notes and from the release of the Principal Amortisation Reserve Accounts not applied towards the amortisation of the Class B Notes, as well as the amount released from the cash reserves, were used to amortise the Limited Recourse Loans. Any excess was returned to the relevant Originator in the form of Class B Notes interest.

PORTFOLIO PERFORMANCE
As of the November 2017 payment date, the overall portfolio consisted of 4,585 loans granted to 4,132 borrowers with an aggregate principal balance of EUR 685.9 million.

Loans in arrears between 31 days and 60 days and loans in arrears between 61 days and 90 days represented 1.4% and 0.6% of the principal outstanding balance of the portfolio, respectively, while delinquencies greater than 90 days were 2.4%. As of this publication date, no loans have been classified as defaulted.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the remaining pool and updated its portfolio default and recovery assumptions on the outstanding portfolio to 45.6% and 54.4%, respectively, at the AA (sf) rating level.

CREDIT ENHANCEMENT
Following the 6 December 2017 amendments, the CE for Class A Notes was 31.4%, down from 105.3% prior to the amendments. The CE of the Class A Notes considers the balance of the performing portfolio (excluding delinquencies greater than 90 days) and the cash reserve accounts.

The structure includes 28 non-amortising cash reserve accounts, each one funded at closing by the relevant Originator through a Limited Recourse Loan, with an original aggregate balance of EUR 65.9 million. Within the scope of this Restructuring, each individual reserve was decreased to the equivalent of 3.011% of the relevant portfolio balance as of 31 October 2017 to an aggregate amount of EUR 20.7 million.

As mentioned, BNP Paribas, Milan will act as Transaction Bank, Italian Paying Agent, Cash Manager, Principal Paying Agent and Agent Bank while BNP Paribas, London will act as the English Transaction Bank. On the basis of DBRS’s private ratings of both BNP Paribas, Milan and BNP Paribas, London and the mitigants outlined in the transaction documents, DBRS considers the risk arising from the exposure to the Transaction Bank and the English Transaction Bank to be consistent with the ratings assigned to the Class A Notes.

INTEREST RATE RISK
In August 2012 the Issuer entered into two basis interest rate swap agreements with J.P. Morgan Securities Plc, whose private rating complies with DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology. However, as the rating provisions in place are not fully compliant with DBRS’s methodology in terms of collateral posting and replacement actions, following the same approach as at closing no credit was given to these contracts in the cash flow analysis.

Despite the presence of two basis swaps in the transaction structure, Class A Notes are exposed to fluctuations of interest rates. To account for interest rate risk, increasing and decreasing interest rate scenarios were run in addition to the forward interest rate curve. The higher the rating level, the more severe interest rate stresses DBRS applies, as discussed in the DBRS “Unified Interest Rate Model for European Securitisations” methodology.

The results of the break-even default rate (BDR) analysis indicate that the Class A Notes can withstand a higher default level than the one required for the AA (sf) rating level. However, in accordance with the “Cash Flow Assumptions for Corporate Credit Securitizations” methodology, DBRS decided to disregard the scenarios with higher BDRs in determining the average because a wide disparity exists in the BDRs derived from the various stress scenarios. This is due to the long recovery lag considered for recoveries coming from secured loans, making the ratings on the Class A Notes more sensitive to sudden upward shifts of Euribor rate.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings 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.

DBRS has conducted a review of the transaction’s legal documents provided in the context of the aforementioned Restructuring. A review of any other transaction’s 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.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf

The sources of data and information used for these ratings include loan-by-loan data provided by the Originators via the Arranger, J.P. Morgan Securities Plc, and semi-annual servicing reports provided by Deutsche Bank AG and Cassa Centrale Banca - Credito Cooperativo del Nord Est S.p.A.

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

At the time of the initial rating, DBRS was not 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.

The last rating action on this transaction took place on 13 October 2017, when DBRS confirmed its rating on the Class A Notes at AA (sf).

The lead analyst responsibilities for this transaction have been transferred to Joana Seara da Costa.

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”):

-- Probability of Default (PD) Rates Used: base case PD of 3.5%, a 10% increase of the base case and a 20% increase of the base case PD.
-- Recovery Rates Used: base case recovery rates of 54.4% at the AA (sf) rating level, a 10% and 20% decrease in the base case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

DBRS concludes that either a hypothetical increase of the base case PD by 20%, a hypothetical decrease of the recovery rate by 10%, or a scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class A Notes at AA (sf). A hypothetical decrease of the recovery rate by 20%, ceteris paribus, or a scenario combining both an increase in the base case PD by 20% and a decrease in the base case recovery rate by 20%, ceteris paribus, would also lead to a downgrade of the Class A Notes at A (high) (sf).

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: Joana Seara da Costa, Senior Financial Analyst
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 10 August 2012

DBRS Ratings Limited
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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

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