DBRS Morningstar Confirms Rating of BCC SME Finance 1 S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (high) (sf) rating of the Class A2 Notes issued by BCC SME Finance 1 S.r.l. (the Issuer).

The rating of the Class A2 Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in May 2060.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the May 2020 payment date.
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables.
-- The current available credit enhancement to the Class A2 Notes to cover the expected losses assumed in line with the AA (high) (sf) rating level.
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

BCC SME Finance 1 S.r.l. is a securitisation collateralised by a portfolio of secured and unsecured loans granted to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. Loans were originally granted by 28 originators, comprising 27 Italian cooperative banks and Mediocredito Trentino-Alto Adige S.p.A. – Investitionsbank Trentino-Südtirol A.G.

PORTFOLIO PERFORMANCE
The transaction pays semiannually. The latest available performance information is as of the May 2020 payment date, when loans that were one to three months in arrears represented 3.8% of the outstanding portfolio balance, the 90+ delinquency ratio was 2.2%, and the cumulative default ratio stood at 0.0%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated the portfolio’s one-year base case PD assumption to 4.5%, following coronavirus-related adjustments. DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool and updated its PD and recovery assumptions on the outstanding portfolio to 53.7% and 59.5%, respectively, at the AA (high) (sf) rating level.

The increased base case PD assumption reflects the adjustments applied because of the coronavirus pandemic. As per DBRS Morningstar’s assessment, 2.3% and 37.9% of the outstanding portfolio balance represented industries classified in mid-high and high risk economic sectors, respectively, which led to the underlying one-year PDs to be multiplied by 1.5 and 2.0 times, respectively, as per the relevant commentaries mentioned below.

On 18 May 2020, DBRS Morningstar released its “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary, where DBRS Morningstar discussed the overall risk exposure of the SME sector to the coronavirus and provided a framework for identifying the transactions that are more at risk and likely to be affected by the fallout of the pandemic on the economy. For more details, please see: https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

CREDIT ENHANCEMENT
As of May 2020, the credit enhancement to the Class A2 Notes was 58.5%, up from 46.1% since May 2019. The credit enhancement of the Class A2 Notes considers the balance of the performing portfolio (excluding delinquencies greater than 90 days) and the cash reserve accounts.

The structure includes 28 nonamortising cash reserve accounts, each one funded at closing by the relevant originator through a limited recourse loan, with the current aggregate balance of EUR 20.7 million.

BNP Paribas Securities Services S.C.A., Milan branch acts as transaction bank, Italian paying agent, cash manager, principal paying agent, and agent bank for this transaction while BNP Paribas Securities Services S.C.A., London branch acts as the English transaction bank. On the basis of DBRS Morningstar’s private ratings of both BNP Paribas, Milan branch and BNP Paribas, London branch, the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS Morningstar considers the risk arising from the exposure to the transaction bank and the English transaction bank to be consistent with the rating of the Class A2 Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

J.P. Morgan Securities plc and JPMorgan Chase Bank, N.A. are the Swap Counterparty and Swap Guarantor, respectively. DBRS Morningstar’s private rating of J.P. Morgan Securities Limited and its public rating of JPMorgan Chase Bank, N.A. are consistent with the First Rating Threshold defined in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

However, as the rating provisions in place are not fully compliant with DBRS Morningstar’s methodology in terms of collateral posting and replacement actions, no credit was given to these contracts in the cash flow analysis.

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.

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 payment holidays and delinquencies may continue to increase in the coming months for many SME transactions, some meaningfully. 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 increased the expected default rate on receivables granted to obligors operating in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus as mentioned above.

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 2 December 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-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.

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 CLOs Backed by Loans to European SMEs” (30 September 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the surveillance section of 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: 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 this rating include investor and servicer reports provided by Deutsche Bank AG and Cassa Centrale Banca - Credito Cooperativo del Nord Est S.p.A., and loan-level data from the European DataWarehouse GmbH.

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

At the time of the initial rating, DBRS Morningstar was not 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.

The last rating action on this transaction took place on 3 December 2019, when DBRS Morningstar confirmed its rating of the Class A2 Notes at AA (high) (sf).

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at 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):
-- PD Rates Used: Base case PD of 4.5%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rates of 59.5% at the AA (high) (sf) stress level for the Class A2 Notes, a 10% and 20% decrease in the base case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery-rate levels.

DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A2 Notes at AA (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Class A2 Notes at AA (high) (sf).

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 GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Alfonso Candelas, Senior Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 10 August 2012; Class A2 Notes: 6 December 2017

DBRS Ratings GmbH
Neue Mainzer Straße 75
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 CLOs Backed by Loans to European SMEs (30 September 2020) and DBRS Morningstar SME Diversity Model 2.4.1.0, https://www.dbrsmorningstar.com/research/367642/rating-clos-backed-by-loans-to-european-smes.
-- 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.
-- Cash Flow Assumptions for Corporate Credit Securitizations (21 July 2020),
https://www.dbrsmorningstar.com/research/364311/cash-flow-assumptions-for-corporate-credit-securitizations.
--Rating CLOs and CDOs of Large Corporate Credit (21 July 2020), https://www.dbrsmorningstar.com/research/364310/rating-clos-and-cdos-of-large-corporate-credit.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (22 April 2020),
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (21 September 2020),
https://www.dbrsmorningstar.com/research/366958/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020),
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.

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].