DBRS Morningstar Upgrades Ratings on CR VOLTERRA 2 SPV S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) upgraded its ratings on the notes issued by CR VOLTERRA 2 SPV S.r.l. (the Issuer) as follows:

-- Class A (2013) Notes to AA (high) (sf) from AA (low) (sf)
-- Class A (2016) Notes to AA (high) (sf) from AA (low) (sf)
-- Class M (2016) Notes to A (high) (sf) from A (sf)

The ratings on the Class A (2013) and Class A (2016) Notes (together, the Class A Notes) address the timely payment of interest and the ultimate payment of principal by the final maturity date. The rating on the Class M (2016) Notes (the Class M Notes) addresses the ultimate payment of interest and principal by the final maturity date.

The upgrades follow an annual review of the transaction and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the February 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.

CR VOLTERRA 2 SPV S.r.l. is a securitisation of Italian residential mortgage loans originated by Cassa di Risparmio di Volterra S.p.A. (CR Volterra). The transaction initially closed in July 2013, when the special-purpose vehicle issued the Class A (2013) Notes and Class J Notes. In July 2016, the transaction was restructured to include a further portfolio of first- and second-lien mortgage loans, financed through the issuance of two additional classes of notes, the Class A (2016) Notes and the Class M (2016) Notes. In the context of the restructuring, CR Volterra repurchased defaulted receivables and 60+ day arrears. The properties are concentrated in Tuscany, notably in the provinces of Pisa and Livorno. CR Volterra services the collateral portfolio, with Banca Finanziaria Internazionale S.p.A. acting as backup servicer facilitator.

On 12 April 2019, the servicing agreement was amended, increasing the limit for margin reductions on the collateral portfolio, to 12% of the original portfolio balance, up from 6%.

The Class M Notes are subordinated to the Class A Notes at all times, with respect to interest and principal payments. A cumulative default-based interest subordination trigger is in place with respect to the Class M Notes. If cumulative defaults rise above a certain threshold, the Class M Notes interest will be deferred after Class A Notes principal.

PORTFOLIO PERFORMANCE

As of the February 2021 payment date, loans that were two to three months in arrears represented 0.6% of the outstanding portfolio balance, from last year. The 90+ delinquency ratio was 1.5%, slightly down from 1.8% as of the February 2020 payment date. The gross cumulative default ratio was 3.2% of the initial portfolio balance, up from 2.6% last year, with cumulative recoveries equal to 18.2% of the defaulted amounts.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS

DBRS Morningstar conducted an analysis of the current pool of receivables, and updated its base case PD and LGD assumptions at 11.6% and 19.4%, respectively (including coronavirus-related adjustments). The upgrades were mainly prompted by the increase in credit enhancement levels for both Class A and Class M Notes.

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

CREDIT ENHANCEMENT

Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the rated notes. As of the February 2021 payment date, credit enhancements to the Class A and Class M Notes were 43.3% and 32.9%, respectively, up from 35.2% and 26.4%, respectively, as of the February 2020 payment date.

The transaction benefits from an amortising cash reserve, which provides liquidity support and is available to cover senior fees and interest payments on the Class A and Class M Notes (if no Class M interest subordination event has occurred). The cash reserve is currently at its target level of EUR 2.8 million, which accounts for 2.17% of the outstanding balance of the Class A and Class M Notes. The reserve is floored at EUR 1.6 million.

A commingling reserve is also in place, currently funded to the target level of EUR 3.5 million, or 2.72% of the outstanding balance of the Class A and Class M Notes. The commingling reserve is available to cover senior fees and interest payments on the Class A and Class M Notes in case of potential disruptions in the servicing activities.

BNP Paribas Securities Services, Milan branch acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structure, 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.

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 securities (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 January 2020 cut-off, the number of borrowers in payment holiday was not material for the purpose of DBRS Morningstar’s analysis.

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 crisis is likely to affect 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.

The rating on the Class M Notes at A (high) (sf) materially deviates from the higher rating implied by the quantitative model. DBRS Morningstar considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by a quantitative model that is a substantial component of a rating methodology. In this case, the rating addresses the ultimate payment of interest and principal on or before the final maturity date as defined in the transaction legal documents. DBRS Morningstar typically expects bonds rated in the AA (sf) category to be able to pay interest on a timely basis at the time they are the most senior bond outstanding.

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 provided by CR Volterra, 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 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 9 April 2020, when DBRS Morningstar confirmed its ratings on the Class A Notes and Class M Notes at AA (low) (sf) and A (sf), respectively.

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 ratings, 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.

-- The base case PD and LGD of the current pool of loans for the Issuer are 11.6% and 19.4%, 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 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).

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

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: David Lautier, Senior Vice President
Initial Rating Dates: Class A (2013) Notes – 31 July 2013; Class A (2016) and Class M (2016) Notes – 8 August 2016

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.
-- 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].