DBRS Assigns Ratings to Quadrivio SME 2018 S.r.l.

DBRS Ratings Limited (DBRS) assigned new ratings to the following notes issued by Quadrivio SME 2018 S.r.l. (the Issuer or Quadrivio SME 2018):

-- EUR 320,000,000 Class A1 Asset Backed Floating Rate Notes due January 2050, rated AAA (sf)
-- EUR 400,000,000 Class A2 Asset Backed Floating Rate Notes due January 2050, rated AAA (sf)
-- EUR 200,000,000 Class A3 Asset Backed Floating Rate Notes due January 2050, rated AAA (sf)
-- EUR 102,200,000 Class B Asset Backed Floating Rate Notes due January 2050, rated AA (high) (sf)
-- EUR 100,000,000 Class C1 Asset Backed Floating Rate Notes due January 2050, rated BB (high) (sf)
-- EUR 89,800,000 Class C2 Asset Backed Floating Rate Notes due January 2050, rated BB (high) (sf)

The ratings on the Class A1, Class A2 and Class A3 Notes (together, the Class A Notes) address the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date. The ratings on the Class B, Class C1 and Class C2 Notes address the ultimate payment of interest and ultimate payment of principal on or before the Final Maturity Date, in accordance with the transaction documentation. The Issuer also issued EUR 260,000,000 Class J Notes which were not rated by DBRS.

Quadrivio SME 2018 is a cash flow securitisation collateralised by a portfolio of performing loans to small- and medium-sized enterprises (SME), entrepreneurs, artisans and producer families based in Italy. The loans were granted by Credito Valtellinese S.p.A. (Credito Valtellinese or the Originator) and by Credito Siciliano S.p.A. before being merged into Credito Valtellinese in June 2018.

The economic effect of the transfer of the portfolio from the Originator to the Issuer took place on 7 July 2018 (the Effective Date). As of the Effective Date, the portfolio consisted of 10,668 loans extended to 9,080 borrowers, with an aggregate par balance of EUR 1.46 billion, of which EUR 69.31 million was in arrears for less than 30 days.

In a pre-enforcement scenario, the structure allows for interest on the Class A1, Class A2 and Class A3 Notes to be paid pari passu and pro rata, whereas the principal is paid sequentially. Interest on the Class B Notes and the Class C1 and Class C2 Notes (together, the Class C Notes) is paid in priority to the principal on the Class A Notes. Both interest and principal on the Class C Notes are paid pari passu and pro rata.

The transaction incorporates triggers on the performance of the portfolio to defer interest payments on the Class B and Class C Notes after the principal payments on the Class A Notes.

The Class A Notes benefit from a total credit enhancement (CE) of 37.8% provided by subordination of the Class B, Class C and Class J Notes and the cash reserve. The Class B and the Class C Notes benefit from a CE of 30.8% and 17.7%, respectively.

The transaction includes a cash reserve, which is available to cover senior fees and interest on the Class A and Class B Notes. The cash reserve will amortise subject to the target level being equal to 1% of the outstanding balance of the Class A and Class B Notes.

The transferred portfolio, totalling EUR 1.46 billion, consists of senior unsecured loans representing 50.3% of the outstanding portfolio balance and mortgage-backed loans representing 49.7%. The historical performance data indicates that mortgage-backed loans have a higher historical probability of default than the unsecured loans. This behaviour is in line with other SME loan originators. The higher probability of default (PD) for mortgage loans is compensated by higher recoveries expectations compared with unsecured loans.

The portfolio exhibits a significant geographical concentration in the Italian regions of Lombardy and Sicily, which account for 49.1% and 22.7% of the portfolio outstanding balance, respectively. This geographical concentration reflects the bank’s significant presence in these two regions.

The portfolio exhibits a moderate sector concentration. The top three sector exposures, according to DBRS’s industry classifications are Building & Development, Farming & Agriculture and Business Equipment & Services, which represent 24.5%, 11.1% and 8.2% of the outstanding portfolio balance, respectively. The portfolio does not have a significant borrower concentration, as the top one, five and ten borrowers only account for 1.2%, 3.5% and 5.6% of the outstanding portfolio balance, respectively.

Credito Valtellinese acts as the servicer, and Securitisation Services S.p.A. acts as the back-up servicer for this transaction. The back-up servicer will step in within 30 days if the servicer’s appointment has been terminated. To account for the warm back-up servicer arrangements, DBRS has factored a commingling loss in its cash flow analysis, in line with other Italian SME collateralised loan obligation (CLO) transactions.

DBRS determined these ratings as follows, as per the principal methodology specified below:
-- The PD for the portfolio was determined using the historical performance information supplied. DBRS assumed an annualised PD of 6.8% and 2.9% for mortgage and non-mortgage loans, respectively.
--The assumed weighted-average life (WAL) of the portfolio was 3.9 years.
-- The PDs and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the assigned ratings.
-- The recovery rate was determined by considering the market value declines for Europe, the security level and type of the collateral. Recovery rates of 52.2% and 13.4% were used for the secured and unsecured loans, respectively, at the AAA (sf) rating level; 60.4% and 15.6% at the AA (high) (sf) rating level, respectively; and 78.3% and 21.3% at the BB (high) (sf) rating level, respectively.
-- The break-even rates for the interest rate stresses and default timings were determined using DBRS’s cash flow tool.

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 Société Générale and Credito Valtellinese.

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. DBRS applied additional cash flow stresses in its 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.

These ratings concern newly issued financial instruments. These are the first DBRS ratings 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):

-- PD Used: Base Case PD of 6.8% for mortgage loans and 2.9% for non-mortgage loans, a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 32.4% at the AAA (sf), of 37.6% at the AA (high) (sf) and 49.3% at the BB (high) (sf) stress levels, a 10% and 20% decrease in the Base Case Recovery Rate. Note that the percentage decreases in the recovery rate are assumed for the other stress recovery rate levels.

For the Class A Notes, DBRS concludes that a hypothetical increase of the Base Case PD by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf), a downgrade of the Class B Notes to A (high), and a downgrade of the Class C Notes to B (high), respectively. A hypothetical decrease of the Base Case Recovery Rate by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf), a downgrade of the Class B Notes to A (high) (sf), and a downgrade of the Class C Notes to B (high), respectively. A scenario combining both an increase in the Base Case PD by 10% and a decrease in the Base Case Recovery Rate by 10% would lead to a downgrade of Class A Notes to AA (high) (sf), a downgrade of the Class B Notes to A (high) (sf), and a downgrade of the Class C Notes to B (high) (sf), respectively.

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: Ilaria Maschietto, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 30 July 2018

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
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Interest Rate Stresses for European Structured Finance Transactions
-- Rating CLOs and CDOs of Large Corporate Credit
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

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.