Press Release

DBRS Morningstar Confirms Ratings on Two Intesa SME Transactions

Structured Credit

December 03, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the notes issued by Brera Sec. S.r.l. (SME) (Brera) and Giada Sec. S.r.l. (Giada) as follows:

Brera:
-- Class A Notes at A (high) (sf)

Giada
-- Class A Notes at A (sf)

Both ratings address the timely payment of interest and the ultimate payment of principal on or before the respective legal final maturity dates (October 2070 for Brera and December 2052 for Giada).

The confirmations follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the latest payment date (October 2021 for Brera and September 2021 for Giada);
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at their respective rating levels;
-- For Giada only, no purchase termination events or breach of purchase conditions have occurred to date;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Brera is a cash flow securitisation collateralised by a portfolio of secured and unsecured loans granted to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families by Intesa Sanpaolo S.p.A. (ISP) and other banks that used to be part of the ISP group and were officially incorporated into it between November 2018 and February 2019.

Giada is a revolving cash flow securitisation collateralised by a portfolio of unsecured loans granted to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families by ISP and other regional banks, fully owned by ISP. The transaction is structured with a 26-month revolving period, scheduled to end in March 2023, which will prematurely end if certain performance related triggers are breached (e.g., if gross cumulative defaults rise above 8.5% or if the cash reserve does not reach its target). So far, only one additional portfolio has been transferred to the issuer, totaling EUR 1.4 billion.

For Giada, around 67% of the current portfolio balance (up from 58.8% at the closing date) is assisted by the Fondo Centrale di Garanzia (FCG) guarantee, a state guarantee that covers up to 100% of the loan balance. The weighted-average coverage for the current portfolio is equal to 86.2%, stable since the closing date. The recovery rates have been adjusted to account for the FCG guarantee.

ISP covers all key roles in both transactions, including, but not limited to, servicer, account bank, and paying agent. DBRS Morningstar considers the counterparty risk to be consistent with the rating assigned to the Class A Notes in both transactions, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

PORTFOLIO PERFORMANCE
As of the latest portfolio cut-off date (September 2021 for Brera and October 2021 for Giada) delinquencies were low, with 90+ days arrears representing 0.6% and 0.3% of the outstanding portfolio balance of Brera and Giada, respectively. Gross cumulative defaults were equal to 1.3% of the Brera initial portfolio, up from 1.0% last year, while the Giada portfolio recorded only 0.1% of defaults so far. As of 30 September 2021, around 17.2% and 5.2% of the Brera and Giada’s outstanding portfolio balance, respectively, was still in payment holidays (from 31.0% and 17.2% as of 30 September 2020 and the closing date, respectively). Most of the payment holidays are on the principal instalment only.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
For Brera, 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 46.3% and 51.9%, respectively, at the A (high) (sf) rating level.

The base case one-year PD for secured and unsecured loans has been maintained at 5.2% and 1.9%, respectively. Following coronavirus-related adjustments and considering the updated secured/unsecured loans mix, DBRS Morningstar updated the weighted-average base case one-year PD to 4.9%.

For Giada, DBRS Morningstar continued to base its analysis on a stressed portfolio composition, constructed considering an updated amortisation plan and the purchase conditions applicable during the revolving period.

In particular, DBRS Morningstar maintained an annualised PD of 2.1% for the portfolio assumed to be outstanding after the end of the revolving period, and an annualised PD of 1.8% and 2.3% for corporate and retail borrowers, respectively, with respect to the portfolio assumed to be reinvested during the revolving period.

Furthermore, DBRS Morningstar slightly revised its stressed lifetime default and recovery assumptions to 35.0% and 27.1%, respectively, at the A (sf) rating level. The recovery rates continue to be determined by giving only partial credit to the FCG guarantee.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the rated notes. As of the latest payment dates, credit enhancements to the Class A Notes of Brera and Giada were 77.4% and 34.3%, respectively. While for Brera the credit enhancement increased from 59.7% as of the October 2020 payment date, due to portfolio amortisation, the credit enhancement for Giada remained stable since closing, as the transaction is still in its revolving period.

Both transactions benefit from amortising and unfloored cash reserves, available to cover senior fees and interest payments on the Class A Notes. As of the latest payment dates, the cash reserves of Brera and Giada were at their target level of EUR 11.7 million and EUR 112.0 million, respectively.

The transactions are structured with additional cash reserves, funded upon breach of certain triggers. In Brera, the reserve would be funded via the regular priority of payment in order to trap available excess spread, if gross cumulative defaults rose above 8.0%. In Giada, the reserve would be funded via a subordinated loan upon a downgrade of ISP below BB (high), for a target amount equal to EUR 900 million, and would act as a partial mitigant to set-off risk.

ISP acts as the account bank in both transactions. Based on the account bank reference rating of Intesa Sanpaolo at A (low), one notch below its DBRS Morningstar Long-Term Critical Obligations Rating of “A”, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transactions’ structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transactions’ structures in its proprietary Excel-based cash flow engine.

The Coronavirus Disease 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. 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 these transactions, 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, 20.3% and 30.6% of the Brera and Giada’s outstanding portfolio balance, respectively, belonged to industries classified in mid-high- and high-risk economic sectors, 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 transactions benefits from sufficient liquidity support to withstand potentially high levels of payment holidays 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 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.

ESG CONSIDERATIONS
For Giada only, DBRS Morningstar considered the presence of loans backed by the FCG Guarantee to be a social factor (Social Impact of Product & Services) as outlined within the DBRS Morningstar Criteria – “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings”. DBRS Morningstar assumed reduced loss severity for the loans that are backed by FCG Guarantee. This is credit positive and affects the rating, given the reduced loss expectations for guaranteed loans.

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

Other methodologies referenced in these transactions 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 transactions in accordance with the surveillance section of the principal methodology.

For Giada, an asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on the replenishment criteria set forth in the transaction legal documents.

A review of the transactions’ legal documents was not conducted as the legal documents have remained unchanged since the most recent rating actions.

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 these ratings include investor reports provided by Banca Finanziaria Internazionale S.p.A., servicer reports and additional performance information provided by ISP, 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 Brera took place on 11 December 2020, when DBRS Morningstar confirmed its A (high) (sf) rating on the Class A Notes. For Giada, this is the first rating action since the initial rating date (21 December 2020).

The lead analyst responsibilities for Giada have been transferred to Daniele Canestrari.

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).

Brera
-- PD Rates Used: Base case PD of 5.2% for secured loans and 1.9% for unsecured loans, a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: Base case recovery rate of 51.9% at the A (high) (sf) rating level, a 10% and 20% decrease in the base case recovery rate.

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 A Notes at A (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 A Notes at A (high) (sf).

Giada
-- PD Rates Used: Base case PD of 2.9%, a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: Base case recovery rate of 27.1% at the A (sf) rating level, a 10% and 20% decrease in the base case recovery rate.
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 A Notes at A (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 A Notes at A (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 Dates:
-- Brera: 14 December 2018
-- Giada: 21 December 2020

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 these transactions 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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