DBRS Assigns Ratings to 2017 Popolare Bari SME S.r.l.

DBRS Ratings Limited (DBRS) has assigned ratings to the following notes issued by 2017 Popolare Bari SME S.r.l. (or the Issuer):

--EUR 329,544,000 Series 1 Class A1 Notes rated AAA (sf)
--EUR 20,000,000 Series 2 Class A1 Notes rated AAA (sf)
--EUR 150,000,000 Series 2 Class A2 Notes rated AA (high) (sf)
--EUR 57,400,000 Series 2 Class M Notes rated A (low) (sf)

The transaction is a cash flow securitisation collateralised by a portfolio of term loans originated by Banco Popolare di Bari S.C.p.a. (BPB) and Cassa di Risparmio di Orvieto S.p.a. (CRO and, together with BPB, the Originators) to small-and medium-sized enterprises (SMEs) and self-employed individuals based in Italy. The portfolio also contains loans originated by Banca Tercas S.p.A. and Banca Caripe S.p.A. prior to their merger into BPB in July 2016.

In a pre-enforcement scenario, the Series 1 Class A1 Notes, Series 2 Class A1 Notes (together the Class A1 Notes) and Series 2 Class A2 Notes (Class A2 Notes and together with the Class A1 Notes, the “Senior Notes”) are pro rata and pari passu with respect to interest payments. The Class A1 Notes rank senior to the Class A2 Notes with respect to principal payments. The structure allows for interest on the Series 2 Class M Notes (Class M Notes) to be paid before the principal of the Senior Notes, but incorporates a trigger on the performance of the portfolio to defer these interest payments after the principal payments of the Senior Notes. In a post-enforcement scenario, the Class A1 and Class A2 Notes are pari passu and pro rata with respect to both principal and interest payments. The Class A1, Class A2 and Class M Notes are referred to as the Rated Notes. DBRS does not rate the Series 1 Class B1 and Class B2 Notes (the Junior Notes and together with the Rated Notes, the Notes).

The ratings on the Class A1 Notes and Class A2 Notes address the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date (falling in December 2057). The rating of the Class M Notes addresses the ultimate payment of principal and interest in accordance with documentation on or before the Final Maturity Date.

On 28 March 2017, the parties entered into the original transaction under which the initial portfolio of SME loans was purchased with the proceeds from the Series 1 Notes. The proceeds from the issuance of the Series 1 Notes were also used to fund the Cash Reserve (CR) set at EUR 12,543,534.

On 28 February 2018, the parties entered into additional agreements under which additional portfolio totalling EUR 307.2 million was purchased. The additional portfolio was funded by: (1) the issuance of the Series 2 Notes totalling EUR227.4 million, (2) the proceeds resulting from the repurchase of ineligible loans on 16 Jan 2018 totalling EUR 79.8 million, and (3) available principal collection on the initial portfolio since the last interest payment date. The Series 1 Notes had previously not been rated by DBRS.

The economic effect of the transfer of the subsequent portfolio from the Originators to the Issuer took place on 17 January 2018 (the Effective Date). As of 30 November 2017 (the Valuation Date), the transaction portfolio included 11,173 loans to 8,699 obligors with an aggregate par balance of EUR 895.6 million. On the Effective Date, the final portfolio (consisting of the initial portfolio and subsequent portfolio) totalled EUR 873.5 million with additional proceeds standing to the Issuer accounts, including EUR 23.1 million of principal collections.

The ratings of the Class A1, Class A2 and Class M Notes are based upon DBRS’s review of the following items:

(1) The Portfolio characteristics:
The final pool exhibits exposure to the “Building & Development” industry, representing 35.89% of the outstanding balance. The “Farming/Agriculture” (8.12%) and “Food Products” (6.47%) sectors have the second and third largest exposure based on the DBRS Industry classification.

The portfolio consists of loans to borrowers concentrated in the southern and centre regions of Italy. The top three regions include Puglia, Abruzzo and Lazio, representing 31.19%, 18.17% and 11.11% of the outstanding portfolio notional at the Effective Date, respectively. Overall, the portfolio regional concentrations reflect the distribution of the Originators’ branches across Italy.

The transaction is relatively granular with the largest three borrower groups each represented 1.89%, 1.63% and 1.06% of the portfolio notional, respectively. The top ten and top 30 borrowers represent 9.60% and 15.59% of the outstanding portfolio notional at the Effective Date, respectively.

Based on the data of Valuation Date, 46.24% of the portfolio is assumed to be secured by first-lien mortgages.

(2) The Senior Notes are pro rata and pari passu in interest payments, while the Class A1 Notes will rank senior to the Class A2 Notes with respect to the principal payments. The effective deferral trigger on Class M interest (cumulative default above 10% of the initial portfolio), which is expected to limit the leakage of excess spread available to redeem the Class A1 and Class A2 Notes. Aside from senior costs and interest payments, all excess spread is expected to be used to pay down the Rated Notes. Interest and principal payments on the Notes will be made quarterly.

(3) The interest payable on Rated Notes is also floored at zero. DBRS has also factored an adjustment to account for basis and repricing risk.

(4) The transaction lacks mitigants to address the set-off risk, which DBRS estimates at 4.94% of the Valuation Date portfolio balance. This was accounted for in DBRS’s cash flow analysis.

(5) The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting and servicing practices.

(6) The soundness of the legal structure and the presence of legal opinions that address the true sale of the assets to the Issuer as well as consistency with the DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

(7) The credit enhancement for the Class A1 Notes, Class A2 and Class M Notes is 62.42%, 45.69% and 39.29% respectively, which DBRS considers to be sufficient to support the assigned ratings.

(8) The CR is expected to be available to cover shortfalls of senior fees and interests on the Senior Notes as well as principal shortfalls at the Final Maturity Date. The CR is non-amortising and therefore will increase the liquidity protection to the Senior Notes as they pay down.

DBRS determined the rating of the Rated Notes as follows, as per the principal methodology specified below:
-- The combined annualised probability of default (PD) for BPB and CRO, determined using the arrears data supplied, was computed to be 7.18%.
-- The assumed weighted average life (WAL) of the portfolio was 5.69 years.
-- 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 (“MVDs”) for Italy, the security level, and the type of collateral. Recovery rates of 63.22% and 13.50% were used for the secured and unsecured loans (respectively) at the AAA (sf) rating level, 69.96% and 15.75% (respectively) at the AA (high) (sf) rating level and 77.63% and 16.25% (respectively) at A (low) (sf) rating level.
-- 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 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.

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 the parties involved in the rating, including but not limited to the Originators, Banca Popolare di Bari and Cassa di Risparmio di Orvieto and the Arranger, Société Générale.

DBRS did not rely upon third-party due diligence in order to conduct its 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 90 days used by DBRS. Additional dynamic arrears data were provided by the Originator to determine a conservative average annual default rate. DBRS opted to use dynamic delinquency data based on numbers, adjusted with a multiplier to derive the comparable input data. Despite the above, DBRS considers the overall information available to it for the purposes of providing this rating was of satisfactory quality.

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

This is the first DBRS rating on these financial instruments.

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 Rates Used: Base Case PD of 7.18%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case Recovery Rate of 36.49% at the AAA stress level, 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 a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would not each lead to a downgrade of the Class A1 Notes ratings. A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a downgrade of the Class A1 to AA (high) (sf). Regarding the Class A2 Notes, a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would not each lead to a downgrade of the Class A2 Notes. A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would not lead to a downgrade of the Class A2 rating.

Regarding the Class M Notes, a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would each lead to a downgrade of the Class M Notes to BBB (high) (sf) and BBB (high) (sf) respectively. A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a downgrade of the Class M Notes.

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: Mudasar Chaudhry, Vice President Analyst
Rating Committee Chair: Carlos Silva, Senior Vice President, Head of EU Structured Credit
Initial Rating Date: 28-Feb-2018

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 (July 2017)
• Legal Criteria for European Structured Finance Transactions (September 2017)
• Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (December 2017)
• Interest Rate Stresses for European Structured Finance Transactions (December 2017)
• Rating CLOs and CDOs of Large Corporate Credit (January 2018)
• Cash Flow Assumptions for Corporate Credit Securitizations (January 2018)
• Operational Risk Assessment for European Structured Finance Servicers (October 2017)
• Operational Risk Assessment for European Structured Finance Originators (October 2017)

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.