Press Release

DBRS Morningstar Upgrades Ratings on 2019 Popolare Bari SME S.r.l.

Structured Credit

August 05, 2021

DBRS Ratings GmbH (DBRS Morningstar) upgraded its ratings on the notes issued by 2019 Popolare Bari SME S.r.l. (the Issuer) as follows:

-- Class A1 Notes to AA (high) (sf) from AA (sf)
-- Class A2 Notes to AA (low) (sf) from A (sf)

The rating on the Class A1 Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2059. The rating on the Class A2 Notes addresses the ultimate payment of interest and the ultimate payment of principal on or before the legal 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 May 2021 payment date;
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables;
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective rating levels; and
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The transaction is a cash flow securitisation 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 Banca Popolare di Bari S.p.A. (BPB) and Cassa di Risparmio di Orvieto S.p.A. (CRO). The portfolio also contains loans originated by Banca Tercas S.p.A. and Banca Caripe S.p.A. prior to their merger into BPB in July 2016.

In a pre-enforcement scenario, the structure allows for interest and principal on Class A1 Notes to be paid in priority to interest and principal on Class A2 Notes. Unless a cumulative defaults-based interest subordination event is breached, interest on Class A2 Notes is paid in priority to principal on Class A1 Notes. In a post-enforcement scenario, the Class A1 and Class A2 Notes are pari passu and pro rata with respect to both principal and interest payments.

PORTFOLIO PERFORMANCE
As of the April 2021 cut-off date, delinquencies were low with loans two to three months and 90+ days in arrears representing 0.23% and 0.04% of the outstanding portfolio balance, respectively. Despite low arrears, a significant portion of the current portfolio (around 61.5%) is still under coronavirus-related payment holidays. As of April 2021, gross cumulative defaults represented 2.67% of the initial portfolio balance, with insignificant recoveries recorded so far.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its lifetime default and recovery assumptions on the outstanding portfolio to 70.3% and 31.3%, respectively, at the AA (high) (sf) rating level and to 68.3% and 31.3%, respectively, at the AA (low) (sf) rating level. The base case one-year PDs for mortgage and nonmortgage loans remain as follows:

-- 7.8% and 5.4% for mortgage and nonmortgage loans originated by BPB, respectively.
-- 6.8% and 3.2% for mortgage and nonmortgage loans originated by CRO, respectively.

Following coronavirus-related adjustments and considering the current portfolio composition, DBRS Morningstar updated the weighted-average base case one-year PD to 10.1%.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the rated notes and, only in the case of the Class A1 Notes, includes the liquidity reserve. As of the May 2021 payment date, credit enhancement to Class A1 and Class A2 Notes was 70.2% and 59.6%, respectively, up from 51.5% and 43.6%, respectively, as of the May 2020 payment date. The increase in credit enhancement was the main driver behind the ratings upgrade.

The transaction benefits from a nonamortising liquidity reserve, available to cover senior fees and interest payments on the Class A1 Notes. As of the May 2021 payment date, the reserve was at its target level of EUR 16.8 million, or 2.25% of the Class A1 and Class A2 Notes’ initial balance. On the payment date on which the Class A1 Notes will be redeemed in full, the target will be reduced to zero.

BNP Paribas Securities Services, Milan branch (BNP Milan) acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on BNP Milan, 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 rating 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 its proprietary 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 delinquencies may continue to increase in the coming months for many SME transactions, some meaningfully. The rating is 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 obligors in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus. As per DBRS Morningstar’s assessment, 1.8% and 31.6% of the outstanding portfolio balance belonged to industries classified in mid-high- and high-risk economic sectors, respectively, which leads to the underlying one-year PDs to be multiplied by 1.5 times (x) and 2.0x, as per the commentaries mentioned below. 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.

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 18 May 2020, DBRS Morningstar released its “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary, where 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 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.

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 “Global Methodology for Rating Sovereign Governments” 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 Banca Finanziaria Internazionale S.p.A., servicer reports provided by BPB, 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 7 August 2020, when DBRS Morningstar confirmed its AA (sf) and A (sf) ratings on the Class A1 and Class A2 Notes, 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):
-- PD Rates Used: Base case PD of 7.8% and 5.4% for mortgage and nonmortgage loans originated by BPB, respectively; base case PD of 6.8% and 3.2% for mortgage and nonmortgage loans originated by CRO, respectively; a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: Base case recovery rate of 31.3% at both the AA (high) (sf) and AA (sf) rating level, a 10% and 20% decrease in the base case recovery rate. Note that the percentage decreases in the recovery rate are assumed for the other stress recovery rate levels.

DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A1 Notes at AA (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would also lead to a confirmation of the Class A1 Notes at AA (high) (sf).

DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A2 Notes at AA (low) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would also lead to a confirmation of the Class A2 Notes at AA (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: Daniele Canestrari, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 8 August 2019

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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