DBRS Downgrades BPL Mortgages S.r.l., Series VII Following Transaction Restructuring

DBRS Ratings Limited (DBRS) downgraded the notes issued by BPL Mortgages S.r.l. (the Issuer), in the context of the seventh securitisation transaction of the Issuer (BPL VII), as follows:

-- Class A - 2014 downgraded to A (sf) from AA (high) (sf)
-- Series A2 - 2016 downgraded to A (sf) from AA (high) (sf)
-- Class B - 2014 downgraded to BBB (high) (sf) from A (high) (sf)
-- Series B2 - 2016 downgraded to BBB (high) (sf) from A (high) (sf)

The rating downgrades follow an entire review of the transaction in the context of a restructuring that became effective on 12 April 2018 (the 2018 Restructuring) and are based on the following analytical considerations:
-- The amendments to the transaction in the context of the 2018 Restructuring;
-- The overall portfolio and transaction characteristics;
-- The updated portfolio default rate, recovery rate and expected loss assumptions for the collateral pool;
-- The current available credit enhancement (CE) to the Class A - 2014 and the Series A2 – 2016 notes (together, the Class A Notes) to cover the expected losses assumed in line with the A (sf) rating level, and to the Class B - 2014 and the Series B2 – 2016 notes (together, the Class B Notes) to cover the expected losses assumed in line with the BBB (high) (sf) rating level.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested.
-- The soundness of the legal structure and the presence of legal opinions that address the true sale of the assets to the trust and the non-consolidation of the Issuer, as well as consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

The ratings on the Class A Notes and on the Class B Notes (together, the Rated Notes) address the timely payment of interest and ultimate payment of principal payable on or before the Maturity Date in November 2054.

BPL VII is a securitisation collateralised by a portfolio of secured and unsecured loans to Italian small- and medium-sized enterprises (SMEs), entrepreneurs, artisans and producer families that were granted by Banco Popolare – Società Cooperativa (BP) or one of its regional banks. In January 2017, BP and Banca Popolare di Milano S.C.a.r.l. merged into Banco BPM SpA (Banco BPM).

The transaction closed in June 2014 and in February 2016, following a transaction restructuring, BPL VII acquired a second portfolio from BP and sold all loans in arrears by 57 days or more comprised in the pool as of 25 January 2016. The second portfolio included both newly originated performing loans and loans from the previous SME CLO of the Issuer, BPL Mortgages S.r.l. – Series VI, which was unwound on 19 February 2016. The acquisition of the Subsequent Portfolio was financed through the issuance of new classes of notes: Series A2 - 2016, Series B2 - 2016 and Series C2 - 2016.

AMENDMENTS
BPL VII acquired a further portfolio (Subsequent Portfolio) from Banco BPM and Banca Popolare di Milano S.p.A. (BPM) with an aggregate principal outstanding balance of EUR 3,716.4 million and sold all defaulted loans and loans in arrears by 51 days or more, as well as loans eligible for the Banco BPM covered bonds programme back to Banco BPM at par (EUR 579.2 million). Approximately 10.4% of the Subsequent Portfolio comes from the previous SME CLO transaction of the Banco BPM group rated by DBRS, BPM Securitisation 3 S.r.l., which was unwound on 8 March 2018.

To finance the purchase of the Subsequent Portfolio (whose price has been partially set off with the amounts due by Banco BPM to BPL VII for the repurchased loans), on 12 April 2018 BPL VII increased the principal balance of the Class A - 2014, Class B - 2014 and Class C - 2014 notes (together, the Series 1 Notes) by an aggregate amount of EUR 3,185.7 million. In particular, the Class A - 2014 notes have been increased by EUR 2,840.5 million, the Class B - 2014 notes by EUR 56.4 million and the Class C – 2014 notes by EUR 288.5 million.

The new structure replicates exactly the pre-restructuring one and the existing and new notes of each class are considered a single class (they also have the same ISIN) and any reference found in the documents to the Series 1 Notes after the restructuring is intended to also apply to the increased balance.

The Target Cash Reserve Amount has also been amended, switching from a non-amortising EUR 166.4 million target to 6.6% of the Class A Notes and Class B Notes balance, subject to a EUR 100.0 million floor.

PORTFOLIO CHARACTERISTICS
-- As of 26 February 2018, the overall portfolio consisted of 63,199 loans extended to 50,648 borrowers with an aggregate principal balance of EUR 5,176.7 million. Loans in arrears between 31 days and 50 days represented 0.2% of the outstanding principal balance of the portfolio.
-- The portfolio has a weighted-average life (WAL) of 4.9 years, but Servicers’ permitted variations allow increases of the loans’ maturities (up to ten years for 5% of the portfolio and up to 30 years for 10% of the portfolio). To account for such extensions, DBRS has estimated a portfolio WAL equal to 6.8 years.
-- As per DBRS’s industry classification, the portfolio exhibits a high concentration towards the Building & Development sector (45.3%).
-- Following the 2018 Restructuring, secured loans (as per DBRS’s definition) decreased to 46.6% of the pool and the weighted-average loan-to-value increased to 55.8%.
-- The portfolio is very granular, with the exposure to the top one, ten and 20 borrowers representing, respectively, 0.7%, 4.0% and 5.9% of the portfolio. The portfolio geographical concentration in Northern Italy (67.5%) reflects Banco BPM’s and BPM’s presence in the country.

TRANSACTION CHARACTERISTICS
-- The priority of payments ensures that all excess spread is used to amortise the Rated Notes before junior payments are made; however, the lack of a trigger based on transaction performance to defer the Class B Notes interest (which ranks senior to principal payments on the Class A Notes) limits the positive impact of such trapping mechanism on the ratings on the Class A Notes.
--The combination of the lack of a trigger to defer the Class B Notes interest and the long recovery lag assumed for recoveries coming from secured loans makes the ratings on the Class A Notes more susceptible to sudden upward interest rate shifts.
-- Banco BPM and BPM act as Servicers of the relevant portfolio and Securitisation Services S.p.A. acts as Back-Up Servicer Facilitator. A back-up servicer will be appointed within 45 calendar days following the downgrade of any of the Servicers below B (low). To account for the lack of adequate mitigants to the commingling risk, a loss has been factored into the rating analysis.
-- The transaction does not benefit from mechanisms to address the exposure to set-off risk. As such, DBRS has factored a loss into the rating analysis.
-- BNP Paribas Securities Services, London branch acts as Transaction Bank and BNP Paribas Securities Services, Milan branch is the Paying Agent for the transaction. DBRS’s private ratings on both institutions comply with the Minimum Institution Rating, given the ratings assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology (the Legal Criteria).
-- Banco BPM acts as Cash Account Bank and holds the Cash Reserve. The Cash Account Bank reference rating of BBB – one notch below the DBRS Long-Term Critical Obligations Rating of Banco BPM at BBB (high) – is consistent with the Minimum Institution Rating given the ratings assigned to the Class A Notes, as described in the Legal Criteria.

PORTFOLIO ASSUMPTIONS
-- DBRS updated its annualised probability of default (PD) assumption to 5.4%, considering the historical data supplied.
-- DBRS conducted a loan-by-loan analysis on the remaining pool and updated its portfolio default and recovery assumptions on the outstanding portfolio to 47.3% and 39.0%, respectively, at the A (sf) rating level, and to 41.5% and 42.2%, respectively, at the BBB (high) (sf) rating level.

CREDIT ENHANCEMENT
Following the 2018 Restructuring, CE to the Class A Notes was 35.9% and the CE to the Class B Notes was 29.5%, which DBRS considers sufficient to cover expected losses assumed in line with A (sf) and BBB (high) (sf) rating levels, respectively. The CE of the Rated Notes considers the balance of the portfolio, collections generated by the securitised pool between 1 February 2018 and 25 February 2018 (EUR 10.3 million) and the Cash Reserve.

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 Banco BPM.

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

At the time of the initial rating DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

The historical performance data provided by Banco BPM for each of the originators was based on the “sofferenza” definition of default, which is different from the standard of 180 days past due definition used by DBRS for Italian SME CLOs. Additional dynamic arrears data was provided and DBRS incorporated that into its analysis to determine a conservative average annual default rate; this approach is typically used to derive the Base Case assumptions for Italian deals as a result of the limitation of the default definition used by the originators. Because of data integrity issues, DBRS decided not to consider the dynamic arrears data provided for BPM, the Additional Originator. Considering DBRS’s Base Case PD assumptions for other Italian SME CLO transactions, and given the better than average historical performance of SME CLO transactions originated by BPM, a PD of 4.9% for the portion of the portfolio originated by BPM was assumed to be conservative enough to account for limitations on the historical data provided.

DBRS considers the data and information available to it for the purposes of providing these ratings 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 28 July 2017, when DBRS upgraded the ratings of Class A -2014 and Series A2 - 2016 to AA (high) (sf) from A (high) (sf), and upgraded the ratings of Class B -2014 and Series B2 - 2016 to A (high) (sf) from A (low) (sf).

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 ratings (the “Base Case”):

-- Probability of Default Rates Used: base case PD of 5.4%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: base case Recovery Rate of 38.9% and 42.1% at the A (sf) and BBB (high) (sf) stress levels, respectively, and 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 lead to a downgrade of the Class A Notes to BBB (high) (sf) and to a downgrade of the Class B Notes to BBB (sf). 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 A Notes to BBB (high) (sf) and to a downgrade of the Class B Notes to BBB (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, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 30 June 2014

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
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
-- Rating CLOs and CDOs of Large Corporate Credit
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Master European Structured Finance Surveillance Methodology

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.