Press Release

DBRS Morningstar Confirms Ratings on Two Credico RMBS Transactions

RMBS

March 19, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) ratings on the Class A Notes issued by Credico Finance 9 S.r.l. (CF9) and Credico Finance 10 S.r.l. (CF10).

The ratings on the Class A Notes address the timely payment of interest and ultimate payment of principal by the respective final maturity dates.

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 for both transactions;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) rating level;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

CF9 and CF10 are securitisations of Italian residential mortgage loans originated and serviced by multiple cooperative and independent Italian banks (BCCs or Banche di Credito Cooperativo), each belonging to ICCREA’s network. ICCREA Banca S.p.A. (ICCREA) covers the role of operating bank and backup servicer and is responsible for supporting the activities of the BCCs in terms of payment services, funding techniques, regulatory, and administrating activities. Zenith Service S.p.A. covers the role of backup servicer facilitator in CF10 only.

The transactions are structured with several combined (principal plus interest) waterfalls, one for each BCC, where each portfolio supports a portion of the Class A Notes on the basis of the respective contribution to the aggregate portfolio. Upon breach of certain conditions (cross-collateral events), the waterfalls will collapse into a unique combined waterfall. There are also other mechanisms in place for the purpose of each portfolio supporting the others, if certain conditions are met (detrimental event and disequilibrium event).

PORTFOLIO PERFORMANCE

For CF9, as of the November 2020 cut-off, loans that were two to three months in arrears represented 0.3% of the outstanding portfolio balance, slightly up from 0.2% as of the November 2019 cut-off. The 90+ delinquency ratio was 0.8% down from 1.3% as of the November 2019 cut-off.

For CF10, loans that were two to three months in arrears represented 0.2% of the outstanding portfolio balance, slightly down from 0.4% compared with the November 2019 cut-off. The 90+ delinquency ratio was 0.6%, marginally decreasing from 0.7% as of the November 2019 cut-off.

As of the November 2020 cut-off, the cumulative gross default ratio was 0.7% and 0.5% of the initial portfolio balance of CF9 and CF10, respectively, stable from the November 2019 cut-off.

At the same portfolio cut-off, cumulative repurchases for CF9 and CF10 were 7.9% and 10.1% of the respective initial portfolio principal balance.
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 as follows:
-- CF9: 7.0% and 10.7%, respectively
-- CF10: 7.4% and 11.3%, 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

Overcollateralisation of the outstanding collateral portfolio provides credit enhancement and includes an amount equal to the difference between the cash reserve and 4% of the outstanding balance of the Class A Notes as at the immediately preceding payment date.

As of the January 2021 payment date, credit enhancement to the Class A Notes of CF9 and CF10 was 65.5% and 76.5%, respectively, up from 53.3% and 60.4%, respectively, as of the January 2020 payment date.

Both transactions benefit from cash reserves (composed by a single reserve for each BCC), available to cover senior expenses, fees, and interest payments on the Class A Notes (also swap payments for CF9). Additionally, the reserves are also available to provide credit support to the rated notes, for an amount equal to the difference between 4% of the outstanding Class A Notes and the cash reserve.

For CF9, the cash reserve is amortising and is reduced by 1.0% annually in January (in case no drawings have been made over the year). As of the January 2021 payment date, the cash reserve was EUR 26.6 million. For CF10, the cash reserve is nonamortising and since closing it has remained at its target level of EUR 79.2 million.

BNP Paribas Securities Services, Milan Branch acts as the Italian account bank for the transactions, with BNP Paribas Securities Services, London Branch appointed as the English account bank. Based on the private rating of the account banks, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transactions’ structure, DBRS Morningstar considers the risk arising from the exposure to the account banks to be consistent with the rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

J.P. Morgan Securities PLC is the swap counterparty for CF9. Swap documents do not include DBRS Morningstar collateral posting thresholds; however, the DBRS Morningstar’s private rating of the swap counterparty is consistent with the first and second rating thresholds, as defined in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology. Obligations under the swap agreement are guaranteed by J.P. Morgan Chase Bank N.A.

DBRS Morningstar analysed the transactions 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 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 these transactions, 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 transactions benefit from sufficient liquidity support to withstand high levels of payment holidays in the portfolios. As of the November 2020 cut-off (latest data available), loans in payment holidays accounted for 11.7% and 6.1% of the outstanding portfolios of CF9 and CF10, respectively.

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 rating 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 transactions in accordance with the principal methodology.

A review of the transactions’ legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in these transactions 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 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 Accounting Partners S.p.A., servicer reports and additional information provided by ICCREA, and loan-level data provided by 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 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 actions on these transactions took place on 23 April 2020, when DBRS Morningstar confirmed its AAA (sf) ratings on the Class A Notes of CF9 and CF10.

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 rating (the Base Case):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pools 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 CF9, the base case PD and LGD of the current pool of loans for the Issuer are 7.0% and 10.7%, respectively.
-- For CF10, the base case PD and LGD of the current pool of loans for the Issuer are 7.4% and 11.3%, 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 CF9 as an example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A Notes would be expected to remain at AAA (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 remain at AAA (sf).

CF9 – Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

CF10 – Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (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

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: David Lautier, Senior Vice President
CF9 Initial Rating Date: 11 July 2011
CF10 Initial Rating Date: 25 April 2012

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of these transactions can be found at: http://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 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].

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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