DBRS Upgrades Rating on Class A Notes Issued by Annette S.r.l.

DBRS Ratings Limited (DBRS) upgraded its rating on the Class A Notes issued by Annette S.r.l. (the Issuer) to A (high) (sf) from A (sf).

The rating action follows an annual review of the transaction and is based on the following analytical considerations:
-- The overall portfolio performance as of the June 2018 payment date, particularly with regard to delinquencies and net losses;
-- The updated probability of default (PD), loss given default (LGD) and expected loss assumptions on the outstanding portfolio; and
-- The current level of credit enhancement (CE) available to the Class A Notes to cover the expected losses assumed in line with the A (high) (sf) rating level.

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the Final Maturity Date in December 2032.

The Issuer is an Italian securitisation of salary assignment loans and payment delegation receivables granted and serviced by Pitagora S.p.A. (Pitagora) to both private and public employees, as well as pension assignment receivables.

The transaction closed in December 2015 and had a ramp-up period that ended on the June 2018 payment date when the Class A Notes reached a balance of EUR 302.8 million and the unrated Class B Notes reached an outstanding balance of EUR 105.1 million. The EUR 348.1 million portfolio (excluding defaulted receivables) includes loans granted to employees from both the private (30.1% of the portfolio loan balance) and public sector (19.1%), as well as pensioners (50.7%).

PORTFOLIO PERFORMANCE
As at the June 2018 payment date, loans delinquent by one, two and three months represented 4.6%, 1.3% and 0.4% of the outstanding principal balance of the portfolio, respectively, while loans delinquent for more than three months represented 0.7% of the portfolio. The Cumulative Net Default Ratio was 0.8%.

PORTFOLIO ASSUMPTIONS
Following the end of the ramp-up period, DBRS conducted a loan-by-loan analysis on the current pool and updated its base case PD and LGD assumptions to 8.3% and 38.9%, respectively, from 8.0% and 30.7% as at the Initial Rating Date.

CREDIT ENHANCEMENT
CE is provided by the subordination of the junior obligations and the Cash Reserve Account. As at the June 2018 payment date, the Class A Notes’ CE was 15.4%.

The Cash Reserve Account, currently funded with EUR 8.4 million, is available to cover senior expenses and missed interest payments on the Class A Notes. The required level of the Cash Reserve Account is set at 2.4% of the portfolio balance, subject to a EUR 3.2 million floor.

Additionally, a prepayment reserve is available to cover prepayment losses related to capitalised fees that may be retained upon prepayment. The prepayment reserve target amount is equal to 1.25% of the portfolio balance.

BNP Paribas Securities Services SCA, Milan branch (BNP Milan) is the Account Bank for the transaction. On the basis of the DBRS private ratings of BNP Milan and the mitigants outlined in the transaction documents, DBRS considers the risk arising from the exposure to the Account Bank to be consistent with 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 the “Master European Structured Finance Surveillance Methodology”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

DBRS reviewed the legal documents related to the size increase of the Class B Notes to EUR 134.0 million from EUR 84 million in January 2018. A review of the remaining transaction legal documents was not conducted as they 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 this rating include reports provided by Zenith Service S.p.A., the Calculation Agent, and loan-by-loan data provided by Pitagora.

DBRS does 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 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 is the first rating action since the Initial Rating Date.

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 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”):

-- DBRS expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.

-- The base case PD and LGD of the current pool are 8.3% and 38.9%, respectively. At the A (high) (sf) rating level, the corresponding PD is 23.8% and the LGD is 57.6%,

-- The Risk Sensitivity overview below illustrates the ratings expected for the Class A Notes if the PD and LGD increase by certain percentages over the base case assumptions. For example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to remain at A (high) (sf), all else being equal. If the PD increases by 50%, the rating on the Class A Notes would be expected to decrease to A (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected decrease to A (low) (sf), all else being equal.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (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: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 7 July 2017

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.

-- Master European Structured Finance Surveillance Methodology
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Originators
-- 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.

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