DBRS Morningstar Assigns Provisional Ratings to Eridano II SPV S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned the following provisional ratings to the class of notes to be issued by Eridano II SPV S.r.l. (the Issuer):

-- Class A Asset-Backed Floating-Rate Notes at AA (low) (sf)
-- Class B Asset-Backed Floating-Rate Notes at A (sf)

The ratings are provisional ratings based on information provided to DBRS Morningstar by the Issuer and its agents as at the date of this press release. The ratings can be finalised upon receipt of final information and data and of an executed version of the governing transaction documents. To the extent that the documents and the information provided to DBRS Morningstar as of this date differ from the executed version of the governing transaction documents, DBRS Morningstar may assign different final ratings to the rated notes.

The rating of the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal maturity date. The rating on the Class B Notes addresses the ultimate payment of interest and ultimate repayment of principal by the legal maturity date while junior to the Class A Notes but the timely payment of interest when they are the most-senior tranche, in accordance with the Issuer’s default definition in the transaction documents. DBRS Morningstar does not rate the Class C Notes.

The transaction represents the issuance of Class A and Class B Notes (collectively, the Rated Notes) and Class C Notes (together with the Rated Notes, the Notes) backed by a pool of approximately EUR 343.88 million of Italian consumer loan contracts related to salary and pension assignment loans as well as payment delegation loans granted to Italian employees and pensioners. The majority of the provisional portfolio (83.7%) was originated by ViViBanca S.p.A. (ViviBanca), with the remaining 16.3% originated by MCE Locam S.p.A. ViviBanca also acts as the servicer of the transaction.

DBRS Morningstar currently rates the Class A1, Class A2-R, Class A3, and Class B Notes at A (sf). These notes were issued on 18 December 2019 on a partly paid basis. The existing securitisation transaction included a ramp-up period that ended on the payment date falling in May 2020 (included). During the ramp-up period, the Issuer purchased additional receivables from the sellers, ViviBanca and Legion CQ S.r.l., with proceeds from the subscription of the notes and with principal funds provisioned from the amortisation of the portfolio.

The net proceeds of the issuance of the new Notes will be applied on the new issue date to (1) redeem in full the Class A1, Class A2-R, Class A3, Class B, and Class C notes; (2) finance the purchase of an additional portfolio from ViviBanca; (3) replenish the cash reserve and the prepayment reserve up to the new required amount, (4) and pay upfront fees, costs, and expenses.

The new securitisation transaction is expected to benefit from a cash reserve, which will be funded with part of the proceeds of subscription of the Class C Notes and can be used to cover shortfalls in senior expenses, senior swap payments, interest of the Class A Notes, and interest of the Class B Notes provided no interest subordination event has occurred.

The Rated Notes pay interest indexed to one-month Euribor plus a margin. The interest rate risk arising from the mismatch between the floating-rate notes and the fixed-rate collateral is expected to be hedged through an interest rate swap with an eligible counterparty.

DBRS Morningstar determined its ratings based on its “Rating European Consumer and Commercial Asset-Backed Securitisations” methodology and the following considerations:
-- The transaction’s capital structure and the form and sufficiency of available credit enhancement in the form of subordination, reserve funds, and excess spread.
-- The ability of the transaction’s structure and triggers to withstand stressed cash flow assumptions in order to timely or ultimately pay interest, as the case may be, and ultimately repay the principal under the notes before the final legal maturity date according to the terms of the transaction documents.
-- ViviBanca’s financial strength and its capabilities with respect to originations, underwriting, and servicing.
-- An updated operational risk review of ViviBanca, which DBRS Morningstar conducted in September 2020; DBRS Morningstar deemed it to be an acceptable originator and servicer.
-- The appointment upon closing of a backup servicer.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality, diversification of the collateral and historical and projected performance of the seller’s portfolio.
-- The credit quality of the collateral and ability of the servicer to perform collection activities on the collateral.
-- The sovereign rating of the Republic of Italy, currently rated BBB (high) with a Negative trend by DBRS Morningstar.
-- The consistency of the legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker, considering the default rates at which the Rated Notes did not return all specified cash flows.

INFORMATION ON COVID-19
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many ABS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar commentary: https://www.dbrsmorningstar.com/research/360734.

For more information on DBRS Morningstar considerations for European Structured Credit transactions and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar commentary: https://www.dbrsmorningstar.com/research/361098.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is “Rating European Consumer and Commercial Asset-Backed Securitisations” (3 September 2020).

DBRS Morningstar 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 at: http://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments

The sources of data and information used for these ratings include performance data relating to the receivables provided by the originator directly or through the arranger, Société Générale S.A.

DBRS Morningstar received the following data information, split by type of product, type of borrower/employer, and type of event:
-- Static quarterly default data from Q3 2009 to Q2 2020;
-- Static quarterly recovery data from Q3 2009 to Q2 2020.

DBRS Morningstar received the following data information, split by type of product and type of borrower/employer:
-- Static quarterly prepayment data from Q3 2009 to Q2 2020.

In addition, DBRS Morningstar received loan-level characteristics as at 31 August 2020.

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

DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar ratings on this financial instrument.

On 18 December 2019, DBRS Morningstar assigned A (sf) ratings to the Class A1, Class A2-R, Class A3, and Class B Notes issued by Eridano II SPV.

The lead analyst responsibilities for this transaction have been transferred to Ilaria Maschietto.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- Probability of default (PD) used: Expected PD of 35.1% and 16.2% for an AA (low) (sf) and A (sf) scenario, respectively, a 25% and 50% increase on the applicable PD.
-- Recovery rate used: Expected recovery rate of 40.7% and 49.5% for an AA (low) (sf) and A (sf) scenario, respectively.
-- Loss given default (LGD) used: Expected LGD of 59.3% and 50.5% for an AA (low) (sf) and A (sf) scenario, respectively, a 25% and 50% increase on the applicable LGD.

Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected default and a 25% increase on the expected LGD.
Scenario 5: A 50% increase in the expected default and a 25% increase on the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and a 50% increase on the expected LGD.
Scenario 8: A 50% increase in the expected default and a 50% increase on the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are
-- Class A Notes: A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (sf), A (high) (sf), A (sf), A (sf).
-- Class B Notes: A (sf), A (low) (sf), A (sf), A (low) (sf), A (low) (sf), A (sf), A (low) (sf), A (low) (sf).

For further information on DBRS Morningstar 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 U.S. regulations only.

Lead Analyst: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 5 October 2020

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020), https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020), https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].