Press Release

DBRS Morningstar Confirms Ratings of Fino 1 Securitisation S.r.l.; Trend Remains Negative

Nonperforming Loans

November 12, 2020

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the Class A, Class B, and Class C notes issued by Fino 1 Securitisation S.r.l. (the Issuer) at BBB (high) (sf), BB (high) (sf), and BB (sf), respectively. The trend remains Negative on all ratings.

The transaction represents the issuance of Class A, Class B, Class C, and Class D notes (collectively, the Notes). At issuance, the notes were backed by a EUR 5.37 billion portfolio by gross book value (GBV) consisting of secured and unsecured nonperforming loans (NPLs) originated by UniCredit S.p.A. The loans are serviced by doValue S.p.A. (doValue), which acts as the master servicer, special servicer, and administrative servicer.

As of the cut-off date, the portfolio consisted of secured commercial and residential loans (51.9% of total GBV) and unsecured loans (48.1% of total GBV) granted mostly to Italian small and medium-size enterprises (SMEs; 93.0% of total GBV).

RATING RATIONALE
The rating confirmations follow the third annual review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 30 June 2020, focusing on: (1) a comparison between actual gross collections and the servicer’s initial business plan forecast; (2) the collection performance observed over the past six months, including the period following the outbreak of the Coronavirus Disease (COVID-19); and (3) a comparison between the current performance and DBRS Morningstar’s expectations.
-- The Servicer’s updated business plan: prepared as of December 2019 and received in October 2020, compared with doValue’s initial collection expectations.
-- Portfolio characteristics: loan pool composition as of 30 June 2020 and evolution of its core features since issuance.
-- Transaction liquidating structure: the order of priority entails a fully sequential amortisation of the notes (i.e., the Class B notes will begin to amortise following the full repayment of the Class A notes, and the Class C notes will amortise following the repayment of the Class B notes).
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure, covering potential interest shortfalls on the Class A notes and senior fees. The cash reserve target amount is equal to 5% of the principal outstanding on the Class A notes and is currently fully funded.

TRANSACTION AND PERFORMANCE

According to the latest July 2020 investor report, the principal amounts outstanding of the Class A, Class B, Class C, and Class D notes were equal to EUR 277.0 million, EUR 29.6 million, EUR 40.0 million, and EUR 50.3 million, respectively. The balance of the Class A notes has amortised by 57.4% since issuance.

As of June 2020, the transaction was performing below the servicer’s initial expectations. The actual cumulative gross collections equaled EUR 620.4 million, whereas doValue’s initial business plan estimated cumulative gross collections of EUR 657.3 million for the same period. Therefore, as of 30 June 2020, the transaction was underperforming by roughly EUR 36.9 million compared with the servicer’s initial expectations (-5.6%).

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 288.2 million in the BBB (high) (sf) stress scenario. Therefore, as of 30 June 2020 the transaction was performing above DBRS Morningstar’s stressed expectations.

In 2020, doValue provided DBRS Morningstar with a revised business plan. The sum of the amount of total actual collections as of June 2020 (EUR 620.4 million) and expected total GDPs from July 2020 onwards based on the updated business plan (EUR 985.8 million) equals to EUR 1,606.2 million and it is higher than the total GDPs estimated by the servicer in the initial business plan (EUR 1,567.4 million). This is the result of an increase by 8.3% of the total amount of collections expected from July 2020 to maturity compared with the initial business plan.

DBRS Morningstar’s BBB (high) (sf) rating stress assumes a haircut of 28.0% to the servicer’s updated business plan (considering actual collections to date and expected future collections). DBRS Morningstar’s CCC (sf) rating scenario assumes no haircut to the servicer’s updated business plan and was only adjusted in terms of timing.

In its rating review, DBRS Morningstar used the Italian residential market value decline (MVD) rates outlined in the “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” methodology published on 21 September 2020. DBRS Morningstar notes that the currently proposed Italian residential MVDs in the “European RMBS Insight: Italian Addendum - Request for Comment” methodology published on 2 November 2020 are not likely to lead to a further rating action. For details, see the following methodology: https://www.dbrsmorningstar.com/research/369177/european-rmbs-insight-italian-addendum-request-for-comment.

The final maturity date of the transaction is October 2045.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have resulted in a sharp economic contraction, increases in unemployment rates, and reduced investment activities. DBRS Morningstar anticipates that collections in European nonperforming loan (NPL) securitisations will continue to be disrupted in the coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from NPLs and the related real estate collateral. The rating is based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in property prices, but gave partial credit to house price increases from 2023 onwards in non-investment-grade rating stress scenarios. DBRS Morningstar updated its estimated gross cash flow (from July 2020 onwards) at the BBB (high) (sf) scenario to EUR 534.7 million (a discount of 45.8% from the updated business plan considering expected future collections); at the BB (high) (sf) scenario to EUR 609.0 million (a discount of 38.2% from the updated business plan); and at the BB (sf) scenario to EUR 625.2 million (a discount of 36.6% from the updated business plan).

On 16 April 2020, DBRS Morningstar published 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 on DBRS Morningstar considerations for European NPL transactions and Coronavirus Disease (COVID-19), please see the following commentaries: https://www.dbrsmorningstar.com/research/362326 and https://www.dbrsmorningstar.com/research/360393.

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.
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.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (22 April 2020).

DBRS Morningstar 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 at: https://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 reports from doValue, including an updated data tape as of December 2019, detailed performance data as of June 2020, updated business plan provided in October 2020, and investor report as of July 2020.

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

At the time of the initial ratings, 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 these ratings 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.

The last rating action on this transaction took place on 8 May 2020, when DBRS Morningstar assigned Negative trends to the ratings of the Class A, Class B, and Class C notes.

The lead analyst responsibilities for this transaction have been transferred to Sinem Erol-Aziz.

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 ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (the Base Case):

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 534.7 million at the BBB (high) (sf) stress level, EUR 609.0 million at the BB (high) (sf) stress level, and EUR 625.2 million at the BB (sf) stress level for the remaining transaction term; a 2.5%, 5%, and 10% decrease in the base case recovery rate.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 2.5%, ceteris paribus, would lead to a downgrade of the Class A to BBB (low) (sf) and the confirmation of the Class B and Class C notes at BB (high) (sf) and BB (sf), respectively.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class A and Class C notes to BBB (low) (sf) and BB (low) (sf), respectively, and the confirmation of the Class B notes at BB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class A, Class B, and Class C notes to BB (high) (sf), BB (low) (sf), and B (high) (sf), respectively.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only.

Lead Analyst: Sinem Erol-Aziz, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 November 2017

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://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].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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