Press Release

DBRS Morningstar Upgrades and Confirms Ratings on Quadrivio SME 2018 S.r.l.

Structured Credit

July 28, 2021

DBRS Ratings GmbH (DBRS Morningstar) upgraded two and confirmed two classes of notes (the Notes) issued by Quadrivio SME 2018 S.r.l. (the Issuer) as follows:

-- Class A3 Notes confirmed at AAA (sf)
-- Class B Notes confirmed at AA (high) (sf)
-- Class C1 Notes upgraded to AA (sf) from BBB (high) (sf)
-- Class C2 Notes upgraded to AA (sf) from BBB (high) (sf)

The rating on the Class A3 Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date. The ratings on the Class B Notes, as well as the Class C1 and Class C2 notes (together, the Class C Notes), address the ultimate payment of interest and principal on or before the legal final maturity date, in accordance with the transaction documentation.

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the July 2021 payment date;
-- The one-year base case probability of default (PD) and default and recovery rates on the outstanding receivables;
-- The current available credit enhancement to the Notes to cover the expected losses assumed in line with their respective rating levels;
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Quadrivio SME 2018 is a cash flow securitisation established in July 2018 and collateralised by a portfolio of loans to small and medium-size enterprises (SME), entrepreneurs, artisans, and producer families based in Italy. The loans were granted by Credito Valtellinese S.p.A. (Credito Valtellinese, also the servicer) and Credito Siciliano S.p.A. before being merged into Credito Valtellinese in June 2018.

PORTFOLIO PERFORMANCE
The transaction’s performance has been stable since closing. As of July 2021, loans that were two to three months in arrears represented 0.0% of the outstanding portfolio balance, down from 0.7% in July 2020. The 90+ delinquency ratio was 0.2% (vs 0.5% at the time of the last annual review) and the cumulative gross default ratio stood at 3.0% of the original portfolio balance, up from 2.5% in July 2020.

As of 30 June 2021, approximately 18% of the portfolio was reported to be currently under principal grace periods, compared with 38% at the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated the portfolio’s one-year base case PD assumption to 8.0% (including coronavirus-related adjustments). Following the release of the SME Diversity Model v2.5.0.0, DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool of receivables and updated its lifetime default and recovery assumptions on the outstanding portfolio to 31.1% and 62.6%, respectively, at the B (sf) rating level, compared with 23.8% and 55.5% one year ago.

CREDIT ENHANCEMENT
The Class A3 Notes benefit from a total credit enhancement of 86.6%, compared with 69.0% as of the last annual review. This is provided by subordination of the Class B, Class C and Class J Notes, and the cash reserve. The Class B and the Class C Notes benefit from credit enhancement of 70.6% and 40.8%, versus 56.2% and 32.5% one year ago, respectively.

The increase of credit enhancement in the Class C Notes prompted the rating upgrades.

The transaction includes a cash reserve, which is available to cover senior fees and interest on the Class A3 and Class B Notes. The cash reserve will amortise subject to the target level being equal to 1% of the outstanding balance of the Class A and Class B Notes with a floor of EUR 6.0 million. As of the July 2021 payment date, the cash reserve was at its required amount of EUR 6.0 million.

Citibank N.A., Milan branch acts as the account bank for the transaction. Based on the private rating of the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Class A3 Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

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

The coronavirus and the resulting isolation measures have caused an economic contraction, leading in some cases to 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 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 on receivables granted to obligors operating in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus. As per DBRS Morningstar’s assessment, 4.7% and 26.6% of the outstanding portfolio balance represented industries classified in the mid-high and high-risk economic sectors, respectively. This led the underlying one-year PDs to be multiplied by 1.5 times (x) and 2.0x, respectively, as per DBRS Morningstar’s “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary released on 18 May 2020, wherein 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 more 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.

DBRS Morningstar also conducted an additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolio.

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.

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: “Rating CLOs Backed by Loans to European SMEs” (28 June 2021).

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 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.

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 “Rating Sovereign Governments” methodology at: https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports provided by Securitisation Services S.p.A., servicer reports provided by Credito Valtellinese, and loan-by-loan 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 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 12 February 2021 when DBRS Morningstar discontinued its rating on the Class A2 Notes, following their full repayment. Prior to that, on 28 July 2020, DBRS Morningstar confirmed the ratings on the Class A2 Notes and A3 Notes at AAA (sf), confirmed the rating on the Class B Notes at AA (high) (sf), and confirmed the ratings on the Class C1 and Class C2 Notes at BBB (high) (sf).

The lead analyst responsibilities for this transaction have been transferred to Helvia Meana.

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.

-- PD Rates Used: Base case PD of 6.8% for mortgage loans and 2.9% for nonmortgage loans, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rates of 43.4% at the AAA (sf) and 49.7% at the AA (high) (sf) and AA (sf) stress levels, a 10% and 20% decrease in the base case recovery rate.

For the Class A3 Notes, DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Class A3 Notes at AAA (sf), a confirmation of the Class B Notes at AA (high) (sf), and a downgrade of the Class C Notes to A (high) (sf). A hypothetical decrease of the base case recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A3 Notes at AAA (sf), a confirmation of the Class B Notes at AA (high) (sf), and a downgrade of the Class C Notes to A (sf). Finally, a scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10% would lead to a confirmation of the Class A3 Notes at AAA (sf), a confirmation of the Class B Notes at AA (high) (sf), and a downgrade of the Class C Notes to 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: Helvia Meana, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 30 July 2018

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:
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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