DBRS Assigns Rating to Sardegna Re-Finance S.r.l.

DBRS Ratings Limited (DBRS) assigned the following rating to the Class A Residential Mortgage Backed Floating Rate Partly Paid Notes (Class A Notes) issued by Sardegna Re-Finance S.r.l. (Issuer).

-- EUR 1,151,000,000 Class A Notes at AA (low) (sf)

The rating addresses timely payment of interest and the ultimate payment of principal on the Class A Notes. DBRS does not rate the EUR 366,500,000 Class J Residential Mortgage Backed Variable Return Partly Paid Notes (Class J Notes). During the two-year Ramp-Up period principal collections along with proceeds from increasing the Class A and Class J Notes (the Notes) can be used to purchase further portfolios allowing the Notes to be increased up to their Nominal Amounts subject to portfolio limits and eligibility criteria. The Nominal Amounts for the Class A and J Notes is EUR 1,668,800,000 and EUR 531,200,000 respectively.

The purchase of the Initial Portfolio was funded via the issuance of the Class A and the Class J Notes at their Initial Subscription Payment amount. The cash reserve stands at EUR 22,500,000 and was fully funded via the issuance of the Class J Notes. During the Ramp-Up period the cash reserve is equal to 1.5% of the performing portfolio outstanding principal balance (including the outstanding principal of any further portfolios). After the Ramp-Up period, the cash reserve will be equal and floored at the higher of 1.5% of the portfolio performing outstanding principal and 1.75% of the Class A Notes outstanding balance. The Class A Notes benefit from 23.0% credit enhamcement (as a percentage of the Initial Portfolio) at closing.

The Initial Portfolio consists of Italian residential mortgage loans originated by Banco di Sardegna S.p.A. (BdS), which is also the Servicer and Cash Manager. The back-up servicer facilitator is BPER Banca S.p.A. (BPER). BdS is part of the BPER group.

As of 31 August 2017, the Initial Portfolio consists of 19,494 mortgage loans extended to 19,023 borrowers. The total balance of the Initial Portfolio amounts approximately to EUR 1,5 billion. The average loan per borrower is EUR 76,476. The weighted-average (WA) seasoning of the Initial Portfolio is 4.3 years with a WA residual maturity of 17.6 years. The WA loan-to-value of the Initial Portfolio is 52.1%. Almost the whole Initial Portfolio is located within the Sardinia Region.

28.7% of the Initial Portfolio are floating rate loans, 69.8% fixed rate loans (for life) with remaining 1.5% optional loans. No swaps are in place to hedge the basis and fixed to floating interest rate risk.

The Account Bank provider is BNP Paribas Securities Services, Milan Branch. The DBRS private rating of the Account Bank complies with the threshold for the Account Bank, given the rating assigned to the Class A Notes.

The rating is based upon review by DBRS of the following analytical considerations:
-- The transaction capital structure, form and sufficiency of available credit enhancement and liquidity provisions.
-- The dynamic portfolio characteristic, assessed by simulating a stressed portfolio based on the eligibility criteria and the current portfolio characteristics. The European RMBS Credit Model was used to estimate the expected probability of default (PD), loss given default (LGD) and expected loss of the worst case portfolio.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the Terms and Conditions of the notes.
-- Incorporation of a sovereign-related stress component in the stress scenarios as a result of the BBB (high) rating assigned by DBRS to the Republic of Italy.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating 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.

An asset and a cashflow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 information used for this rating include default historical performance data and loan-level data as at August 2017, provided by Stormharbour Securities LLP and A&F S.r.l..

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

DBRS was supplied with one or more 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 rated financial instrument. This is the first DBRS rating on this 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): in respect of the Class A Notes, the PD and LGD at the AA (low) (sf) stress scenario of 53.39% and 39.34%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS concludes the following impact on the Class A Notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (sf).
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (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: Antonio Di Marco, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 19 December 2017

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.

-- Derivative Criteria for European Structured Finance Transactions
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Interest Rate Stresses for European Structured Finance Transactions
-- 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