DBRS Confirms Rating on Lanterna Finance S.r.l., Following Transaction Restructuring

DBRS Ratings Limited (DBRS) confirmed its AAA (sf) rating on the Class A Notes issued by Lanterna Finance S.r.l. (the Issuer).

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date.

The confirmation follows an entire review of the transaction in the context of a restructurirng that became effective on 25 May 2018 and is based on the following analytical considerations:

-- An amendment to the transaction executed on 25 May 2018 (the Retranching Date).
-- Portfolio performance, in terms of delinquencies, defaults and losses.
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels.

The Issuer is a cash flow securitisation carried out by the Banca Carige banking group and collateralised by a portfolio of bank loans to Italian small and medium-sized enterprises (SMEs).

AMENDMENT
As of the Retranching Date, there have been some changes to the transaction, including:

• Class A Notes outstanding balance increased to EUR 200 million from EUR 5.3 million.
• Class B Notes outstanding balance reduced to EUR 137.1 million from EUR 331.8 million.
• Class A Notes coupon lowered to 50 basis points (bps) from 120bps, with the coupon cap lowered to 2.5% from 4.0%.
• Cash Reserve (CR; current and initial amount) reduced to EUR 5 million from EUR 5.7 million. Floor reduced to EUR 3 million from EUR 5.7 million, with its target balance remaining at 2.5% of Class A Notes outstanding balance.

PORTFOLIO PERFORMANCE
As of 30 April 2018, the outstanding portfolio balance was EUR 365.8 million. Loans that were 31+ days in arrears represented 7.3% of the outstanding portfolio balance. The cumulative net default ratio was 1.13%.

PORTFOLIO ASSUMPTIONS
DBRS was provided with updated historical dynamic arrears data and updated its annualised PD for the securitisation portfolio to 6.6%.

CREDIT ENHANCEMENT
Following the transaction restructuring, credit enhancement to the Class A Notes was 47.3%, similar as at closing. Credit enhancement is provided by subordination of the Class B Notes and the CR. The amortising CR is available to cover shortfalls in relation to senior fees and Class A Notes interest.

BNP Paribas Securities Services SCA/Milan acts as the Account Bank for this transaction. DBRS’s private rating on BNP Paribas Securities Services SCA/Milan is consistent with the Minimum Institution Rating, given the rating assigned to the Class A Notes, as described in 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: “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 conducted a review of the amendment agreement and legal and tax opinion. A review of any other transaction legal documents was not conducted as the legal 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 the rating include UniCredit Bank AG, the Arranger, and Banca Carige S.p.A., one of the Originators.

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.

DBRS considers the data and information available to it for the purposes of providing the 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 31 July 2017, when DBRS confirmed its rating on the Class A Notes at AAA (sf).

Information regarding DBRS ratings, including definitions, policies and methodologies is available at www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the “Base Case”):

-- PD Rates Used: base case PD of 6.6%, a 10% increase of the base case and a 20% increase of the base case PD.
-- Recovery Rates Used: base case recovery rates of 45.2% at the AAA (sf) stress level for the Class A Notes, 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 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 confirmation of the Class A Notes at AAA (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%, ceteris paribus, would also lead to a confirmation of the Class A Notes at AAA (sf).

For further information on DBRS historic 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: Alfonso Candelas, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 2 December 2015

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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Rating CLOs Backed by Loans to European SMEs
-- Rating CLOs and CDOs of Large Corporate Credit
-- Operational Risk Assessment for European Structured Finance Servicers
-- Interest Rate Stresses for European Structured Finance Transactions

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.