DBRS Upgrades Rating on Class A Notes Issued by Credico Finance 16 S.r.l.

DBRS Ratings Limited (DBRS) upgraded its rating on the Class A Notes issued by Credico Finance 16 S.r.l. (the Issuer) to AA (sf) from AA (low) (sf).

The rating addresses the timely payment of interest and ultimate payment of principal payable on or before the Final Maturity Date falling in December 2056.

The upgrade follows an annual review of the transaction and is based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults and losses as of the September 2018 payment date.
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AA (sf) rating level.

Credico Finance 16 S.r.l. is a securitisation of first lien residential mortgage loans, distributed largely in Northern and Central Italy. The portfolio was originated and is currently serviced by 15 local cooperatives but independent banks that belong to the network of ICCREA Banca S.p.A. (ICCREA). ICCREA acts as the back-up servicer and has been appointed to replace any of the servicers in an event of disruption. The transaction closed in November 2016 when the special-purpose vehicle issued one senior class of floating-rate notes and 16 junior classes of floating-rate notes, namely the Class A Notes and Class B Notes.

PORTFOLIO PERFORMANCE
As of July 2018, two- to three-month arrears represented 0.1% of the outstanding portfolio balance as in July 2017. The 90+ delinquency ratio was 0.4%, up from 0.3% in July 2017. The cumulative default ratio was low at 0.009%, almost two years from closing.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 8.7% and 5.8%, respectively.

CREDIT ENHANCEMENT
As of the September 2018 payment date, credit enhancement to the Class A Notes was 19.7%, up from 15.0% at closing. Credit enhancement to the Class A Notes is provided by the overcollateralisation of the outstanding collateral portfolio balance. The reserve fund is formed by 16 cash reserves and is currently at its target level of EUR 17.2 million, which is 4.0% of the outstanding balance of the Class A Notes. The reserve is available to cover payments of senior expenses, fees, interest on the Class A Notes and partially principal of the Class A Notes. Each cash reserve can be utilised, after payment of senior fees and interest on the Class A Notes (each for the relative percentage), to pay down the Class A Notes up to 80% of the amount of the cash reserve in case the available fund is not enough to cover the scheduled principal payment.

BNP Paribas Securities Services, Milan Branch is the Account Bank for the transaction. The DBRS private rating of the Account Bank 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 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.

A review of the 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 this rating include investor and servicer reports provided by Accounting Partners S.r.l., and loan-level data provided by the European DataWarehouse GmbH.

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 purpose 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.

The last rating action on this transaction took place on 14 November 2017, when DBRS confirmed its AA (low) (sf) rating on the Class A Notes.

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 of loans for the Issuer are 8.7% and 5.8%, respectively.
-- The respective PD and LGD of the current pool at the AA (sf) rating level are 27.2% and 21.3%.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to A (high) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (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: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 14 November 2016

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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
-- Operational Risk Assessment for European Structured Finance Servicers
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- 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.