Press Release

DBRS Morningstar Finalises Provisional Ratings on Pelmo S.r.l.

Consumer Loans & Credit Cards

June 29, 2021

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the notes issued by Pelmo S.r.l. (the Issuer) as follows:

-- Class A Asset-Backed Floating Rate Notes (Class A Notes) at AA (low) (sf)
-- Class B Asset-Backed Floating-Rate Notes (Class B Notes) at A (sf)
-- Class C Asset-Backed Floating-Rate Notes (Class C Notes) at A (low) (sf)

The rating of the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal maturity date. The ratings of the Class B and Class C Notes address the ultimate payment of interest while the relevant class is subordinated and the timely payment of interest as the most-senior class, and the ultimate repayment of principal by the legal final maturity date. DBRS Morningstar does not rate the Class J Notes also issued in this transaction.

The transaction represents the issuance of Class A, Class B, and Class C Notes (collectively, the Rated Notes) and Class J Notes (together with the Rated Notes, the Notes) backed by a portfolio of approximately EUR 208.49 million of Italian consumer loan contracts related to salary and pension assignment loans as well as payment delegation loans granted to Italian employees and pensioners. The portfolio was originated by Sigla S.r.l. (the Originator or Sigla), which also act as the sub-servicer of the portfolio. Banca Finanziaria Internazionale S.p.A. has been appointed as master servicer.

The receivables were initially assigned to the Issuer in October 2018 in the context of the bridge phase of the transaction. The purchase price of the receivables was funded by the Issuer with the proceeds from the issuance of the previous notes. During the bridge phase, the Issuer purchased additional portfolios with further draws on the previous notes and the Issuer's collections available for such purpose. On the issue date, the bridge phase ended and the Issuer used the net proceeds of the Notes to fully redeem the previous notes, replenish the cash reserve, pay upfront fees, costs, and expenses, and discharge any of its outstanding liabilities that arose from the bridge phase.

DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement.
-- Relevant credit enhancement in the form of subordination, reserve funds, and excess spread.
-- Credit enhancement levels sufficient to support DBRS Morningstar’s projected expected net losses under various stressed cash flow assumptions.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the notes.
-- Sigla’s financial strength and capabilities with respect to originations, underwriting, and servicing.
-- DBRS Morningstar’s operational risk review on Sigla, which is deemed to be an acceptable sub-servicer.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality, diversification of the collateral, and historical and projected performance of the Originator’s portfolio.
-- DBRS Morningstar’s sovereign rating of BBB (high) with a Negative trend on the Republic of Italy (Italy).
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, and the presence of legal opinions that address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The securitisation transaction benefits from a non-amortising cash reserve of EUR 2.085 million, which was funded on the issue date with part of the proceeds from the Class J Notes. The cash reserve can be used to cover shortfalls in senior fees and expenses, interest on the Class A Notes, and interest on the Class B and Class C Notes provided no interest subordination event has occurred.

The transaction allocates payments through a combined interest and principal priority of payments. The repayment of the Rated Notes begins on the first payment date falling in August 2021 on a pro rata basis. Performance thresholds are established to trigger the irreversible sequential amortisation of the Rated Notes with the Class A Notes paid in priority to the Class B Notes, and the Class B Notes paid in priority to the Class C Notes.

The Rated Notes pay interest indexed to one-month Euribor plus a margin. The interest rate risk arising from the mismatch between the floating-rate notes and the fixed-rate collateral is hedged through two interest rate caps with an eligible counterparty.

COUNTERPARTIES
The Issuer bank accounts are held at The Bank of New York Mellon SA/NV, Milan Branch (BNYM, Milan). The DBRS Morningstar public Long-Term Senior Debt rating on BNYM, Milan is at AA (high) with a Stable trend. DBRS Morningstar concluded that BNYM, Milan meets the minimum criteria to act in its capacity as the account bank. The transaction contains downgrade provisions relating to the account bank consistent with DBRS Morningstar’s criteria.

BNP Paribas S.A. is the cap counterparty for the transaction. DBRS Morningstar's public Long Term Critical Obligations Rating on BNP Paribas S.A. is at AA (high) with a Stable trend. The hedging documents contain downgrade provisions consistent with DBRS Morningstar’s criteria.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

INFORMATION ON THE CORONAVIRUS DISEASE (COVID-19)
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 asset-backed securities (ABS) transactions, some meaningfully. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

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 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-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 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated ABS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360734/european-abs-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
The high exposure to public sector employees, pensioners, and civil servants makes the transaction dependent on the credit worthiness of the Italian sovereign. DBRS Morningstar considers some of the key drivers behind the latest rating action on Italy—namely Institutional Strength, Governance & Transparency, and Human Capital and Human Rights—to be significant rating factors. According to the latest World Bank governance indicators, Italy ranks in the 62nd percentile for Rule of Law in 2019 and, according to the International Monetary Fund, Italy’s GDP per capita of USD 33,200 in 2019 was low compared with its euro area peers. These factors were taken into account in the Economic Structure and Performance and Political Environment building block of DBRS Morningstar’s “Global Methodology for Rating Sovereign Governments”.

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: “Rating European Consumer and Commercial Asset-Backed Securitisations” (3 September 2020).

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

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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 the Originator directly or through the arranger, Société Générale S.A.

DBRS Morningstar received the following data and information:
-- Static quarterly default data from Q3 2014 to Q4 2020, split by type of borrower/employer (pensioner, public, para-public, & private) and each furtherly split by type of default event (death, job loss, unpaid instalment).
-- Static quarterly recovery data from Q3 2014 to Q4 2020, split by type of borrower/employer (pensioner, public, para-public, & private) and by type of default event (death, job loss, unpaid instalment).
-- Static quarterly prepayment data from Q3 2014 to Q4 2020.
-- Dynamic quarterly delinquency data from Q1 2017 to Q1 2021, split by type of borrower/employer (pensioner, public, para-public, private).

DBRS Morningstar was also provided with detailed loan-by-loan characteristics and stratification tables of the outstanding portfolio as at 31 May 2021 and related amortisation schedule.

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

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.

These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

Sensitivity Analysis: 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):
-- Probability of default (PD) used: Expected PD of 33.3%, 18.9% and 16.0% for the AA (low) (sf), A (sf), and A (low) (sf) scenario, respectively, a 25% and 50% increase on the applicable PD.
-- Recovery rate used: Expected recovery rate of 60.8%, 81.7% and 89.3% for the AA (low) (sf), A (sf), and A (low) (sf) scenario, respectively.
-- Loss given default (LGD) used: Expected LGD of 39.2%, 18.3% and 10.7% for the AA (low) (sf), A (sf), and A (low) (sf) scenario, respectively, a 25% and 50% increase on the applicable LGD.

Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected default and a 25% increase on the expected LGD.
Scenario 5: A 50% increase in the expected default and a 25% increase on the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and a 50% increase on the expected LGD.
Scenario 8: A 50% increase in the expected default and a 50% increase on the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are:
-- Class A Notes: A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf).
-- Class B Notes: A (sf), A (low) (sf), A (sf), A (low) (sf), A (low) (sf), A (sf), A (low) (sf), A (low) (sf).
-- Class C Notes: A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf), A (low) (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: Ilaria Maschietto, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 June 2021

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 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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