DBRS Assigns Ratings to Siena PMI 2016 S.r.l. - Series 2-2019

DBRS Ratings GmbH (DBRS) assigned ratings to the following notes issued by Siena PMI 2016 S.r.l. – Series 2-2019 (the Issuer or Siena PMI 2019):

-- EUR 519,400,000 Series 2 Class A1 Asset Backed Floating Rate Notes due February 2060, rated AAA (sf)
-- EUR 813,000,000 Series 2 Class A2 Asset Backed Floating Rate Notes due February 2060, rated AAA (sf)
-- EUR 225,800,000 Series 2 Class B Asset Backed Floating Rate Notes due February 2060, rated AA (low) (sf)
-- EUR 271,000,000 Series 2 Class C Asset Backed Floating Rate Notes due February 2060, rated BB (high) (sf)
-- EUR 248,500,000 Series 2 Class D Asset Backed Floating Rate Notes due February 2060, rated CC (sf)

The ratings on the Class A1 and Class A2 Notes (together, the Class A Notes) address the timely payment of interest and ultimate repayment of principal on or before the Final Maturity Date in February 2060. The rating on the Class B Notes addresses the timely payment of interest and ultimate payment of principal on or before the Final Maturity Date, in accordance with the transaction documentation. The ratings on the Class C and Class D Notes address the ultimate payment of interest and ultimate repayment of principal on or before the Final Maturity Date. The Issuer also issued EUR 180,700,000 Series 2 Class J Asset Backed Variable Return Notes due February 2060 which were not rated by DBRS.

Siena PMI 2019 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 Banca Monte dei Paschi di Siena S.p.A. (BMPS or the Originator). A small percentage of the portfolio (totalling approximately 2.5% of outstanding notional) was originated by Banca Antonveneta S.p.A., Banca Agricola Mantovana S.p.A. and Banca Toscana S.p.A. before they were merged into BMPS.

The economic effect of the transfer of the portfolio from the Originator to the Issuer took place on 12 April 2019 (the Valuation Date). As of the Valuation Date, the portfolio consisted of 21,595 loans extended to 19,524 borrowers, with an aggregate par balance of EUR 2.26 billion. All loans are performing.

In a pre-enforcement scenario, the structure allows for interest on the Class A1 and Class A2 Notes to be paid pari passu and pro rata, whereas the principal is paid sequentially. Interest on the Class B Notes, Class C and Class D Notes is paid in priority to the principal on the Class A Notes, but it incorporates triggers based on the performance of the portfolio to defer interest payments after the principal payments of the Class A Notes. In a post-enforcement scenario, the Class A1 and Class A2 Notes are pari passu and pro rata with respect to both principal and interest payments.

The transaction includes a cash reserve, which is available to cover senior fees and interest on the Class A1, Class A2, Class B and Class C Notes. The cash reserve will amortise subject to the target level being equal to 2% of the outstanding balance of the Class A1, Class A2, Class B and Class C Notes.

The Class A, Class B and Class C Notes benefit from a total credit enhancement (CE) of 42.6%, 32.6%, and 20.6%, respectively, and it is provided by the overcollateralisation of the portfolio and the cash reserve. The Class D Notes benefit from a CE of 8.0%, provided by the overcollateralisation of the portfolio only.

The transferred portfolio, totalling EUR 2.26 billion, consists of senior unsecured loans representing 67.8% of the outstanding portfolio balance and mortgage-backed loans representing 32.2%. 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 moderate geographical concentration in the Italian region of Tuscany, which accounts for 25.3% of the portfolio outstanding balance. This geographical concentration reflects the bank’s significant presence in this region. The portfolio is further concentrated in the regions of Veneto and Lombardy, accounting for 16.5% and 14.6%, respectively.

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 25.0%, 11.6% and 7.1% 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 0.6%, 2.3% and 3.9% of the outstanding portfolio balance, respectively.

BMPS 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 90 business 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 4.3%.
--The assumed weighted-average life (WAL) of the portfolio was 3.6 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 44.2% and 13.4% were used for the secured and unsecured loans, respectively, at the AAA (sf) rating level; 52.1% and 15.6% at the AA (low) (sf) rating level, respectively; 71.7% and 21.3% at the BB (high) (sf) rating level, respectively; 77.6% and 21.3% at the CCC (low) (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: https://www.dbrs.com/research/333487/rating-sovereign-governments.

The sources of data and information used for these ratings include the arranger and originator, BMPS.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

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 these ratings 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 a newly issued financial instrument. These are the first DBRS ratings 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 4.3%, a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 21.8% at the AAA (sf), of 25.6% at the AA (low) (sf), and of 35.1% at the BB (high) (sf), 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 confirmation of the Class A1 Notes at AAA (sf), a downgrade of the Class A2 Notes to AA (high) (sf), a downgrade of the Class B Notes to A (high) (sf), and a confirmation of the Class C Notes at BB (high) (sf), respectively. A hypothetical decrease of the Base Case Recovery Rate by 20%, ceteris paribus, would lead to a confirmation of the Class A1 and Class A2 Notes at AAA (sf), a downgrade of the Class B Notes to A (high) (sf), and a confirmation of the Class C Notes at BB (high) (sf), 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 confirmation of Class A1 Notes at AAA (sf), a downgrade of the Class A2 Notes to AA (high) (sf), a downgrade of the Class B Notes to A (high) (sf), and a confirmation of the Class C Notes at BB (high) (sf).

Regarding the Class D Notes, the rating would not be affected by a change in either the PD or Recovery Rates.

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 GmbH are subject to EU and US regulations only.

Lead Analyst: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 25 June 2019

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Geschäftsführer: Detlef Scholz
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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.