DBRS Morningstar Assigns Rating to Brera SEC3 S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned a rating of A (high) (sf) to the EUR 6.94 billion Class A notes issued by Brera SEC3 S.r.l. (the Issuer).

The rating addresses timely payment of interest and the Issuer’s obligation to repay principal on the Class A notes. DBRS Morningstar does not rate the EUR 725,400,000 Class B notes.

The purchase of the initial portfolio was funded through the issuance of the Class A notes and the Class B notes, with the cash reserve fully funded at EUR 69,400,000 (1.0% of the initial Class A amount) via a subordinated loan granted by Intesa Sanpaolo SpA (ISP: rated BBB (high) with a Stable trend by DBRS Morningstar). The Class A notes benefit from 9.5% subordination from the Class B notes, plus a 1.0% enhancement provided by the cash reserve. The cash reserve provides liquidity support to cover senior fees and any Class A interest shortfall or principal at the final maturity date in May 2072, if necessary.

The initial portfolio consists of Italian residential mortgage loans originated by ISP, which also acts as the servicer and seller of this transaction.

As of 18 October 2021, the closing portfolio had a total balance of EUR 7.67 billion and consisted of 61,953 mortgage loans extended to 61,391 borrowers. The average loan per borrower was EUR 123,728. The weighted-average (WA) seasoning of the portfolio was 0.9 years with a WA remaining maturity of 25.1 years. The WA current loan-to-value of the portfolio was 73.1%.

The pool is geographically distributed across Italy, with 54.8% of the portfolio located in the wealthy Northern region, 26.0% in Central Italy, and 19.2% in the South of Italy. The top three regions are Lombardy (25.0%), Lazio (12.6%), and Piedmont (8.6%).

The portfolio consists entirely of fixed-rate-for-life loans, with a WA coupon of 1.51%. No swaps are in place to hedge the fixed-to floating interest rate risk; however, the 1.50% cap on the coupon of Class A notes partially mitigates the risk.

The Transaction Account Bank provider is ISP. DBRS Morningstar rates ISP’s Senior Long-Term debt at BBB (high), and ISP’s Critical Obligations Rating is set at “A”. The transaction documents contain downgrade provisions that are commensurate with a rating on the securities of up to A (high), according to DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

The rating is based upon review by DBRS Morningstar of the following analytical considerations:
-- The transaction’s capital structure, including the form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the static mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS Morningstar used the European RMBS Insight model to estimate probability of default (PD), loss given default (LGD), and expected loss (EL) outputs on the mortgage loan portfolio to analyse with DBRS Morningstar’s cash flow tool.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language for the Account Bank in the transaction documents.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the terms and conditions of the notes.
-- The sovereign rating of the Republic of Italy, rated BBB (high) with a Stable trend by DBRS Morningstar, as of the date of this report.
-- The consistency of the legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and presence of legal opinions addressing the assignment of the assets to the Issuer.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading to increases in unemployment rates and income reductions for borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many RMBS transactions. 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 conducted additional analysis to determine the transaction benefits from sufficient liquidity support in case of high level of payment moratoriums in the portfolio.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated RMBS transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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 methodologies applicable to the rating are the European RMBS Insight Methodology (3 June 2021) and the European RMBS Insight: Italian Addendum (21 December 2020).

DBRS Morningstar has applied the principal methodologies consistently and conducted a review of the transaction in accordance with the principal methodology. An asset and a cash flow analysis were both conducted.

Other methodologies referenced in this transaction 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 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 DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include historical performance data from 2011 to 2021 and loan-level data on the whole pool as of 18 October 2021 provided by ISP.

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 this rating 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

In respect of the Class A notes, the PD and LGD at the A (high) (sf) stress scenario of 21.6% and 22.5%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS Morningstar concludes the following impact on the Class A notes:
-- 25% increase of the PD, ceteris paribus would not lead to a downgrade of Class A notes rating.
-- 50% increase of the PD, ceteris paribus would not lead to a downgrade of Class A notes rating.
-- 25% increase of the LGD, ceteris paribus would not lead to a downgrade of Class A notes rating.
-- 50% increase of the LGD, ceteris paribus would not lead to a downgrade of Class A notes rating.
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would not lead to a downgrade of Class A notes rating.
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to “A” (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (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: 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

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 1 December 2021

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Spain
Tel. +34 (91) 903 6500

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.

-- European RMBS Insight Methodology (3 June 2021) and European RMBS Insight Model v. 5.3.0.2.,
https://www.dbrsmorningstar.com/research/379557/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (21 December 2020), https://www.dbrsmorningstar.com/research/371597/european-rmbs-insight-italian-addendum.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021),
https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021),
https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- 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: 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].