DBRS Assigns Rating to Brera Sec. S.r.l. (SME)

DBRS Ratings Limited (DBRS) assigned an A (high) (sf) rating to the Euro 3,750,000,000 Class A Asset Backed Floating Rate Notes due October 2070 (the Class A Notes) issued by Brera Sec. S.r.l. (SME) (the Issuer or Brera SME).

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. The Issuer also issued Euro 1,529,719,000 Class B Asset Backed Fixed Rate and Additional Return Notes due October 2070 (the Class B Notes), which were not rated by DBRS.

Brera SME 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 (1) Intesa Sanpaolo S.p.A. (ISP), (2) Banco di Napoli S.p.A. (BdN), before it merged into ISP in November 2018, (3) Cassa di Risparmio di Bologna S.p.A. (CR Bologna) and (4) Banca CR Firenze S.p.A. (CR Firenze, and together with ISP, BdN and CR Bologna, the Originators).

The Effective Date when the portfolio was transferred to the Issuer from the Originators was 22 October 2018. As of the Effective Date, the portfolio consisted of 53,759 loans extended to 45,171 borrowers, with an aggregate par balance of EUR 5.28 billion, of which EUR 37.66 million was in arrears for less than 90 days.

In a pre-enforcement scenario, the structure allows for interest and principal on the Class A Notes to be paid pari passu and pro rata, in priority of the payment of interest and principal on the Class B Notes.

The Class A Notes benefit from a total credit enhancement (CE) of 29.0%, provided by subordination of the Class B Notes and does not include the cash reserve.

The transaction includes a cash reserve, which is available to cover senior fees and interest on the Class A Notes. The cash reserve will amortise subject to the target level being equal to 2.0% of the outstanding balance of the Class A Notes.

The EUR 5.28 billion transferred portfolio consists of senior unsecured loans representing 59.4% of the outstanding portfolio balance and mortgage-backed loans representing 40.6%. The historical performance data indicates that mortgage-backed loans have a higher historical probability of default (PD) than the unsecured loans. This behaviour is in line with other SME loan originators. The higher PD for mortgage loans is compensated by higher recoveries expectations compared with unsecured loans.

The portfolio is well diversified geographically, with higher concentrations in the Italian regions of Lombardy and Tuscany, which account for 23.4% and 12.7% of the portfolio outstanding balance, respectively.

The portfolio exhibits a significant concentration in the Building & Development sector, as per DBRS’s industry classifications, which represents 32.9% of the outstanding portfolio balance. Concentrations to the other sectors are moderate, with the second- and third-largest exposures to Business Equipment & Services and Farming & Agriculture, representing 8.3% and 7.4% of the outstanding portfolio balance, respectively.

The portfolio is very granular and does not have a significant borrower concentration, as the top one, ten and 20 borrowers only account for 0.2%, 1.2% and 1.9% of the outstanding portfolio balance, respectively.

ISP acts as the master servicer and servicer, while CR Bologna and CR Firenze act as servicers only. As no backup servicing arrangements are in place, 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 5.2% and 1.9% for mortgage and non-mortgage loans, respectively.
--The assumed weighted-average life (WAL) of the portfolio was 5.2 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 61.5% and 15.1% were used for the secured and unsecured loans, respectively, at the A (high) (sf) rating level.
-- 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 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.

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/333487/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include the arrangers, ISP and Banca IMI S.p.A.

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 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 rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

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 5.2% for mortgage loans and 1.9% for non-mortgage loans, a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 31.8% at the A (high) (sf) stress level, 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.

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 BBB (high) (sf), whereas a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would lead to a downgrade of the Class A Notes to A (low) (sf).

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, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 14 December 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.