Press Release

DBRS Morningstar Confirms Rating on Giada Sec. S.r.l.

Structured Credit

November 23, 2022

DBRS Ratings GmbH (DBRS Morningstar) confirmed its A (sf) rating on the Class A Notes issued by Giada Sec. S.r.l. (the Issuer).

The rating addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in December 2052.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the September 2022 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 Class A Notes to cover the expected losses at their A (sf) rating level; and
-- No purchase termination events or breach of purchase conditions to date.

The transaction 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 Intesa Sanpaolo SpA (ISP) and other regional banks, fully owned by ISP. ISP also acts as the servicer of the portfolio. The transaction closed in December 2020 and 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, three additional portfolios have been transferred to the Issuer, totalling EUR 4.0 billion and accounting for 38.0% of the current portfolio performing balance.

Around 82.5% 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 86.5%, which remains stable since the closing date. DBRS Morningstar adjusted the recovery rates to account for the FCG guarantee.

ISP covers all key roles 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 accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

PORTFOLIO PERFORMANCE
As of the 31 July 2022 portfolio cut-off date, delinquencies were low, with 90+-day arrears representing 0.6% of the outstanding portfolio balance, slightly up from 0.3% as at 31 October 2021. The gross cumulative default ratio stood at 0.3% of the initial portfolio balance, slightly up from 0.1% at the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
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 2.2% 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 regard to the portfolio assumed to be reinvested during the revolving period.

Furthermore, DBRS Morningstar revised its stressed lifetime default and recovery assumptions to 31.6% and 30.2%, respectively, at the A (sf) rating level. DBRS Morningstar continues to determine the recovery rates by giving only partial credit to the FCG guarantee.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the Class A Notes. As of the September 2022 payment date, credit enhancement to the Class A Notes is 34.1%, slightly down from 34.3% at closing.

The transaction benefits from an amortising and unfloored cash reserve, available to cover senior fees and interest payments on the Class A Notes. As of the latest payment date, the cash reserve is at its target of EUR 112 million.

The transaction is structured with an additional cash reserve, funded upon the breach of certain triggers. 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. Based on the account bank reference rating of A (low) on ISP (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 transaction’s structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors
DBRS Morningstar considered the presence of loans backed by the FCG guarantee to be a relevant social factor (Social Impact of Product & Services) as outlined within the “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 the FCG guarantee. This is credit positive given the reduced loss expectations for guaranteed loans.

The S factor has changed from the prior credit rating disclosure and no longer affects the rating, as the lifetime assumptions of the stressed portfolio have improved compared with the previous annual review, making the rating output less sensitive to the effect of the FCG guarantee.

There were no Environmental/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

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

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “Rating CLOs Backed by Loans to European SMEs” (10 June 2022).

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.

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

A review of the transaction’s 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/401817/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 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 rating, 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.

The last rating action on this transaction took place on 3 December 2021, when DBRS Morningstar confirmed its A (sf) rating on the Class A Notes.

The lead analyst responsibilities for this transaction have been transferred to Pascale Kallas.

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the rating, 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 2.2%, a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: Base case recovery rate of 30.2% 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 on 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 on 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.

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

Lead Analyst: Pascale Kallas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 21 December 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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