DBRS Confirms Rating of Class A Notes Issued by Sardegna Re-Finance S.r.l.

DBRS Ratings Limited (DBRS) confirmed its AA (low) (sf) rating of the Class A notes issued by Sardegna Re-Finance S.r.l (the Issuer).

The rating of 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 annual review of the transaction and is based on the following analytical considerations:

-- An amendment (the Amendment) to the transaction executed on 6 December 2018.
-- Portfolio performance, in terms of delinquencies, defaults and losses as of the September 2018 payment date.
-- Updated probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining collateral portfolio.
-- Current credit enhancement available to the Class A Notes to cover the expected losses at the AA (low) (sf) rating level.

The Issuer is a securitisation of first-lien residential mortgages originated and serviced by Banco di Sardegna S.p.A. (BdS), which is part of the BPER Group, and BPER S.p.A. is the majority shareholder of BdS. The Issuer issued two classes of floating-rate notes, namely the Class A notes and Class J notes, in December 2017. The transaction follows the standard structure under the Italian securitisation law. The transaction’s ramp-up period, during which the Issuer may acquire further portfolios, is currently scheduled to end in December 2018.

AMENDMENT
Following execution of the Amendment, the cap on the Class A notes coupon has increased to 3.3% from 1.7% and the minimum level of subsidised mortgages during the ramp-up period has been reduced to 30% from 35% of the total portfolio outstanding balance. The transaction’s ramp-up period, which was originally scheduled to end in December 2019, has been reduced to 31 December 2018.

PORTFOLIO PERFORMANCE
As of 31 August 2018, loans two to three months in arrears and loans more than three months in arrears represented 0.6% and 0.09% of the outstanding portfolio balance, respectively. Cumulative defaults represent 0.2% of the initial collateral balance including the additional portfolios purchased.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD assumptions to 18.3% and 19.3%, respectively.

CREDIT ENHANCEMENT
As of the September 2018 payment date, the credit enhancement available to the Class A notes remained at 23%. The source of credit enhancement for the Class A notes consists of the subordination of the Class J notes. The transaction benefits from a cash reserve that is currently at its target amount of 1.5% of the performing portfolio balance plus further portfolio. After the end of the ramp-up period, the target amount will be the higher of 1.5% of the outstanding performing portfolio balance and 1.75% of the outstanding principal of the Class A notes.

BNP Paribas Securities Services, Milan Branch (BNP SS) acts as the account bank to the transaction. The DBRS private rating of BNP SS 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.

DBRS has conducted a review of the transaction’s legal documents provided in the context of the aforementioned Amendment. A review of any other transaction’s legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a ramp-up period in the transaction, the analysis continues to be based on the worst-case ramp-up criteria set forth in the transaction legal documents.

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 servicer reports provided by BdS and loan-by-loan data provided by BdS and 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.

This is the first rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Nathan Levy.

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 base case PD and LGD for the remaining collateral pool based on a review of the current assets as well as the transaction’s eligibility and ramp-up criteria. 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 remaining collateral pool are 18.3% and 19.3%, respectively.

-- 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 be downgraded to A (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A notes would be expected to be downgraded to BB (high) (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 be downgraded to BB (high) (sf).

Class A Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf).
-- 50% increase in LGD, expected rating of A (sf).
-- 25% increase in PD, expected rating of BBB (sf).
-- 50% increase in PD, expected rating of BB (high) (sf).
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (sf).
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf).
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf).
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (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: Nathan Levy, Financial Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 21 December 2017

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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 Originators
-- 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.