Press Release

DBRS Morningstar Takes Rating Actions on Three Italian SME Transactions

Structured Credit

March 01, 2022

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on three Italian SME transactions:

Magnolia BTV S.r.l. (Magnolia)
-- Class A Notes upgraded to A (high) (sf) from A (sf)

Valconca SPV S.r.l. (SME) (Valconca)
-- Class A Notes confirmed at A (high) (sf)

Fanes S.r.l. – Series 2020-1 (Fanes)
-- Series 2020-1-A Notes (Class A Notes) Notes confirmed at A (sf)

The ratings address the timely payment of interest and the ultimate payment of principal by the respective legal final maturity dates.

The rating actions 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 (January 2022 for Magnolia and Valconca, December 2021 for Fanes);
-- 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 Fanes 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.

Magnolia and Valconca are static securitisations collateralised by a portfolio of secured and unsecured loans to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. The loans were granted and are serviced by Banco delle Tre Venezie S.p.A. (BTV) and Banca Popolare Valconca S.p.A. (BPV), respectively.

Fanes is a revolving cash flow securitisation collateralised by a portfolio of secured and unsecured loans to Italian SMEs, entrepreneurs, artisans, and producer families. The portfolio was originated and is serviced by Cassa di Risparmio di Bolzano S.p.A. (CRB). The notes were issued on a partially paid basis and the nominal amounts are equal to EUR 3 billion and EUR 1 billion for the Class A and Class J Notes, respectively. The transaction has a 24-month ramp-up period, scheduled to end in June 2022. Purchases of new receivables can be funded either through portfolio collections and/or payments of further instalments under the notes (subject to a minimum subordination provided by the Class J Notes equal to 36.0%).

Around 46%, 33%, and 15% of the Magnolia, Valconca, and Fanes portfolios, respectively, are assisted by the Fondo Centrale di Garanzia (FCG) guarantee, a state guarantee that covers up to 100% of the loan balance. The recovery rates have been adjusted to account for the FCG guarantee.

PORTFOLIO PERFORMANCE
As of the latest portfolio cut-off date (December 2021 for Magnolia and Valconca, November 2021 for Fanes) delinquencies were low, with 90+ days arrears at or below 0.1%. Gross cumulative defaults as reported by the servicers were equal to 1.8%, 1.7%, and 0.0% for Magnolia, Valconca, and Fanes, respectively.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
For Magnolia and Valconca, 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, at the at the A (high) (sf) rating level, as follows:
-- For Magnolia, to 42.3% and 57.5%, respectively;
-- For Valconca, to 50.1% and 48.7%, respectively.

The base case one-year PD for secured and unsecured loans has been maintained as follows
-- For Magnolia, 4.2% and 3.7%, respectively;
-- For Valconca, 5.0% and 4.4%, 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 4.8% and 5.4% for Magnolia and Valconca, respectively.

For Fanes, DBRS Morningstar continued to base its analysis on a worst-case portfolio created in line with the purchase conditions and the common and specific criteria applicable during the ramp-up period. As the purchase conditions limit the portion of secured loans in the portfolio between a minimum of 50.0% and a maximum of 70.0%, DBRS Morningstar’s analysis was based on the minimum portion of secured loans in the portfolio as it carries the highest loss expectations because of the lower associated recovery rates.

DBRS Morningstar maintained the base case one-year PD for secured and unsecured loans at 4.3% and 2.8%, respectively, on top of which additional coronavirus-related adjustments were applied. As a result, DBRS Morningstar considered a worst-case portfolio weighted-average (WA) one-year PD of 4.3%.

DBRS Morningstar updated its lifetime default and recovery assumptions at the A (sf) rating level to 49.8% and 35.5%, respectively.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio and the cash reserve provides credit enhancement to the rated notes. As of the latest payment dates, credit enhancement to the Class A Notes of Magnolia, Valconca, and Fanes was 31.6%, 32.4%, and 46.8%, respectively, up from 26.7%, 29.5%, and 40.1%, respectively, as of the restructuring date or the last annual review, as the case may be. For Fanes, the credit enhancement during the ramp-up period is subject to a floor of 36.0%.

The transactions benefit from amortising cash reserves, available to cover senior fees and interest payments on the Class A Notes. The target cash reserve amounts are:

-- For Magnolia, 1.5% of the Class A Notes outstanding balance, with a floor at EUR 714,500
-- For Valconca, 1.5% of the Class A Notes outstanding balance, with a floor at EUR 775,000
-- For Fanes, the greater of 2.0% of the Class A Notes outstanding balance and 1.2% of the current portfolio, with a floor at EUR 2.4 million.

As of the latest payment dates, all cash reserves were at their target levels.

BNP Paribas Securities Services, Milan branch (BNP Milan) acts as account bank for all transactions. Based on the DBRS Morningstar private rating of 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 transactions’ structures in its proprietary Excel-based cash flow engine.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate 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, 7.0%, 28.2%, and 36.9% of the Magnolia, Valconca, and Fanes outstanding portfolio balance, respectively, belonged to industries classified in high-risk economic sectors, which leads to the underlying one-year PDs to be multiplied by 1.5 times (x), as per the commentary mentioned below. In addition, DBRS Morningstar conducted additional sensitivity analysis to determine that the transactions benefit 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 9 December 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/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 10 February 2022, DBRS Morningstar updated its 18 May 2020 commentary outlining the impact of the Coronavirus Disease (COVID-19) crisis on the performance of DBRS Morningstar-rated structured credit transactions in Europe almost two years on.
For more details, please see: https://www.dbrsmorningstar.com/research/392167/two-years-into-covid-19-risks-to-european-structured-credit-transactions and https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect.

ESG CONSIDERATIONS
DBRS Morningstar considered the presence of loans backed by the FCG Guarantee to be a significant rating 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 impacts the ratings of Magnolia and Valconca, 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 Fanes, due to the inclusion of a ramp-up 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 BTV, BPV, and CRB, 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 and of the transactions’ amendments, 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 actions on these transactions were as follows:
-- For Magnolia, on 23 March 2021, when DBRS Morningstar downgraded its rating on the Class A Notes to A (sf) from A (high) (sf), following an amendment to the transaction
-- For Valconca, on 28 July 2021, when DBRS Morningstar confirmed its A (high) (sf) rating on the Class A Notes, following an amendment to the transaction
-- For Fanes, on 17 May 2021, when DBRS Morningstar confirmed its A (sf) rating on the Class A Notes. At the same time, DBRS Morningstar also removed the rating from Under Review with Negative Implications (UR-Neg.), where it was placed on 14 April 2021.

The lead analyst responsibilities for Magnolia and Valconca 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).

Magnolia
-- PD Rates Used: Base case PD of 4.2% for secured loans and 3.7% for unsecured loans, a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: Base case recovery rate of 57.5% 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).

Valconca
-- PD Rates Used: Base case PD of 5.0% for secured loans and 4.4% for unsecured loans, a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: Base case recovery rate of 48.7% at the A (high) (sf) rating level, a 10% and 20% decrease in the base case recovery rate.

Fanes
-- PD Rates Used: Base case PD of 4.3% for secured loans and 2.8% for unsecured loans, a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: Base case recovery rate of 35.5% 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 downgrade of the Class A Notes to BBB (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would lead to a downgrade of the Class A Notes 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: 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:
-- Magnolia: 31 July 2019
-- Valconca: 25 July 2018
-- Fanes: 12 June 2020

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 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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