DBRS Morningstar Confirms Ratings on Two Popolare Bari RMBS Transactions

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the notes issued by 2017 Popolare Bari RMBS S.r.l. (BPB 2017) and 2018 Popolare Bari RMBS S.r.l. (BPB 2018) as follows:

BPB 2017:
-- Class A Notes at AA (high) (sf)
-- Class B Notes at AA (low) (sf)

BPB 2018:
-- Class A Notes at AA (high) (sf)
-- Class B Notes at AA (low) (sf)

DBRS Morningstar also removed the Class B Notes issued by BPB 2018 from Under Review with Negative Implications (UR-Neg.), where they were placed on 21 December 2020. For more information, see this press release: https://www.dbrsmorningstar.com/research/371621/dbrs-morningstar-places-four-ratings-of-three-italian-rmbs-transactions-under-review-following-release-of-european-rmbs-insight-italian-addendum.

The ratings on the Class A Notes address the timely payment of interest and ultimate payment of principal by the final maturity date. The ratings on the Class B Notes address the ultimate payment of interest and principal by the final maturity date.
The confirmations follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the January 2021 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective rating levels;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic;
-- Release of DBRS Morningstar’s “European RMBS Insight: Italian Addendum” and corresponding European RMBS Insight Model. For more information, see this press release: https://www.dbrsmorningstar.com/research/371598/dbrs-morningstar-publishes-final-european-rmbs-insight-italian-addendum.

BPB 2017 and BPB 2018 are securitisations of Italian first-lien residential mortgage loans originated and serviced by Banca Popolare di Bari S.p.A. (BPB) and Cassa di Risparmio di Orvieto S.p.A. (CRO; part of the BPB group). The transactions closed in July 2017 and June 2018, respectively, when the special-purpose vehicles issued one class of floating-rate senior notes (Class A Notes), one class of floating-rate mezzanine notes (Class B Notes), and two classes of floating-rate and additional-return junior notes (Class J1 and Class J2 Notes). BPB and CRO service the portfolios, with Zenith Service S.p.A. appointed as backup servicer.
The transactions’ structures are similar, with the Class B Notes fully subordinated to the Class A Notes at all times with respect to both interest and principal payments. Cumulative default-based interest subordination triggers are in place with respect to the Class B Notes. If cumulative defaults rise above a certain threshold, the Class B Notes interest will be deferred after the Class A Notes principal.
The Bank of Italy placed BPB under special administration on 13 December 2019. The special administration terminated on July 2020, at the time of the transformation of the bank into a joint stock company (Societa’ per Azioni) and consequent capital increase. The capital increase was entirely subscribed by Italian state-owned bank, Banca del Mezzogiorno – MedioCredito Centrale S.p.A., which as result became the main shareholder of BPB.

PORTFOLIO PERFORMANCE

Both portfolios are performing within DBRS Morningstar’s initial expectations.

For BPB 2017, as of the December 2020 cut-off date, loans that were two to three months in arrears accounted for 0.6% of the outstanding portfolio while the 90+ delinquency ratio was 2.7%. The cumulative gross default ratio stood at 1.5% of the initial portfolio balance, up from 1.0% as of the March 2020 cut-off date (at the time of the last annual review of the transactions).

For BPB 2018, as of the December 2020 cut-off date, loans that were two- to three-month in arrears accounted for 0.5% of the outstanding portfolio, while the 90+ delinquency ratio was 2.1%. The cumulative gross default ratio was 0.4%, slightly up from 0.2% as of the March 2020 cut-off date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS

DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions for BPB 2017 to 12.1% and 11.3%, respectively, and for BPB 2018 to 11.2% and 11.5%, respectively.

The higher PD and LGD assumptions are the result of the updated “European RMBS Insight: Italian Addendum” and corresponding European RMBS Insight Model.

CREDIT ENHANCEMENT

For both transactions, overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the rated notes.

For BPB 2017, as of the January 2021 payment date, credit enhancement to the Class A and Class B Notes was 38.9% and 25.6%, respectively, up from 33.2% and 21.3%, respectively, as of the April 2020 payment date (at the time of the last annual review of the transactions).

For BPB 2018, as of the January 2021 payment date, credit enhancement to the Class A and Class B Notes was 28.3% and 19.5%, respectively, up from 24.2% and 16.4%, respectively, as of the April 2020 payment date. The increase in credit enhancement contributed to the decision to confirm the Class B Notes rating and to resolve the UR-Neg. status.

Both transactions benefit from an amortising cash reserve, which provides liquidity support and is available to cover senior fees, amounts due to the swap counterparty, and interest payments on the Class A Notes.

As of the January 2021 payment date, both reserves are at their target levels of EUR 10.3 million for BPB 2017 and of EUR 14.0 million for BPB 2018. The target level is equal to 3.0% of the rated notes’ outstanding balance, with a floor equal to 1.0% of the rated notes’ initial balance.

BNP Paribas Securities Services, Milan branch acts as the account bank for both transactions. Based on DBRS Morningstar’s private ratings on the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

For BPB 2017, two swap transactions are in place: one to cover fixed-floating interest rate risk and the other to hedge basis risk on floating-rate loans with cap.

For BPB 2018, three swap transactions are in place: the first to cover fixed-floating interest rate risk, the second to hedge basis risk on floating-rate loans with cap, and the third to hedge basis risk on floating-rate loans without cap.

J.P. Morgan AG acts as the swap counterparty for both transactions. DBRS Morningstar has not given full credit to the swap agreements, as the swap documentation is not consistent with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology, given the ratings assigned to the notes.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

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 continue to increase in the coming months for many residential mortgage-backed security (RMBS) 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.

For this transaction, DBRS Morningstar increased the expected default rate for self-employed borrowers and assumed a moderate decline in residential property prices. In addition, DBRS Morningstar conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolio. As of the December 2020 cut-off date, based on the data provided by BPB, around 4.0% of both portfolios was under payment moratorium.

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 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-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.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus is likely to affect the DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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 regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:

All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (8 February 2021).
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 investor reports provided by Banca Finanziaria Internazionale S.p.A., servicer reports and additional information provided by BPB, and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial ratings, for both transactions, 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.

The last rating actions on BPB 2017 took place on 12 June 2020, when DBRS Morningstar confirmed the ratings on the Class A and Class B Notes at AA (high) (sf) and AA (low) (sf), respectively.

The last rating action on the Class A Notes of BPB 2018 took place on 12 June 2020, when DBRS Morningstar confirmed the rating at AA (high) (sf). The last rating action on the Class B Notes of BPB 2018 took place on 21 December 2020, when DBRS Morningstar placed its AA (low) (sf) rating UR-Neg., following the release of DBRS Morningstar’s “European RMBS Insight: Italian Addendum” and corresponding European RMBS Insight Model.

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 with the parameters used to determine the ratings (the base case):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- For BPB 2017, the base case PD and LGD of the current pool of loans for the issuer are 12.1% and 11.3%, respectively.
-- For BPB 2018, the base case PD and LGD of the current pool of loans for the issuer are 11.2% and 11.5%, respectively.

-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. Taking the Class A Notes of BPB 2017 as example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to remain at AA (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A Notes would be expected to fall to AA (low) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to fall to AA (low) (sf).

BPB 2017

Class A Notes Risk Sensitivity:

-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

Class B Notes Risk Sensitivity:

-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

BPB 2018

Class A Notes Risk Sensitivity:

-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Class B Notes Risk Sensitivity:

-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (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.

DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Daniele Canestrari, Senior Analyst
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: BPB 2017 – 31 July 2017; BPB 2018 – 14 June 2018

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: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (8 February 2021),
https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- 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.
-- European RMBS Insight Methodology (2 April 2020) and European RMBS Insight Model v 5.0.0.1,
https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (21 December 2020),
https://www.dbrsmorningstar.com/research/371597/european-rmbs-insight-italian-addendum.
-- 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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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].