DBRS Morningstar Assigns Ratings to Colt SPV S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned ratings to the notes issued by Colt SPV S.r.l. (Colt SPV or the Issuer) as follows:

-- EUR 375,000,000 Class A Asset Backed Floating Rate Notes due February 2040 (the Class A Notes) at A (sf)
-- EUR 79,100,000 Class B Asset Backed Floating Rate Notes due February 2040 (the Class B Notes and, together with the Class A Notes, the Rated Notes) at B (high) (sf)

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date. The rating on the Class B Notes addresses the ultimate payment of interest and the ultimate repayment of principal by the final maturity date, in accordance with the Issuer’s default definition provided in the transaction documents (i.e., the timely payment of interest when they become the most senior tranche).

DBRS Morningstar does not rate the EUR 116,012,000 Class J Asset Backed Fixed Rate and Additional Return Notes due February 2040 (Class J Notes).

Colt SPV is a static cash flow securitisation collateralised by a portfolio of non-mortgage floating-rate loans granted to Italian corporates and small and medium-size enterprises (SMEs) by illimity Bank S.p.A. (illimity). The loans are assisted by a guarantee issued either by SACE S.p.A. (SACE, 76.2% of the portfolio balance or 42.7% of the loans) or by Fondo Centrale di Garanzia (FCG, 23.8% of the portfolio balance or 57.3% of the loans). The portfolio is serviced by illimity, with Banca Finanziaria Internazionale S.p.A. acting as the backup servicer.

As of 31 October 2022 (the initial selection date), the portfolio consisted of 82 loans extended to 69 borrowers, with an aggregate outstanding principal balance of EUR 531.74 million. As of the initial selection date the loans were performing, however as per DBRS Morningstar’s understanding, some borrowers have been classified as non-performing in the past and have been subject to restructuring measures. The portfolio is non-granular, with top 1, 10, and 20 borrowers representing 5.3%, 41.1%, and 65.8% of the portfolio balance, respectively. As of 31 October 2022, 55 loans were in the pre-amortisation phase (i.e., temporarily paying interest-only instalments).

The transaction benefits from a fully funded cash reserve equal to EUR 11.25 million, available to the Issuer to cover senior expenses and interest payments on the Class A Notes. Released amounts will be available to pay principal on the Class A Notes. The cash reserve was funded through over-issuance of the Class J Notes and has a target amount of 3.0% of the Class A Notes’ outstanding balance. The transaction also benefits from a set-off reserve totaling EUR 23.93 million, fully funded at the issue date through over-issuance of the Class J Notes. The reserve is available to the Issuer to partially mitigate the set-off risk and will be released upon full redemption of the Rated Notes.

The transaction features a combined waterfall with a fully sequential amortisation mechanism, which allows excess spread to be used to pay down principal on the Rated Notes. Interest on the Class B Notes is paid senior to the Class A Notes principal, unless a cumulative gross default based trigger is breached.

The Class A and Class B Notes benefit from a total credit enhancement of 31.6% and 14.6%, respectively. Credit enhancement is provided by the portfolio’s outstanding principal balance (and the cash reserve for the Class A Notes).

The portfolio is geographically concentrated in the northern Italian regions, which represent 83.1% of the portfolio (or 79.3% of the loans). The portfolio shows a relatively good level of industry diversification when compared with other Italian SME CLO transactions rated by DBRS Morningstar. The top three industries, as per DBRS Morningstar industry classification, are building & development, automotive, and business equipment & services, and they represent 13.0%, 12.7%, and 11.2% of the portfolio balance, respectively (or 15.9%, 7.3%, and 19.5% of the loans, respectively).

DBRS Morningstar was not provided with historical performance data, due to the relatively short origination history of the bank. However, the originator provided the borrower's private ratings assigned by an ESMA-registered credit rating agency specialised in Italian non-financial companies. DBRS Morningstar assessed the portfolio credit quality using its internal mapping of such ratings. Furthermore, DBRS Morningstar applied additional adjustments to reflect the expectations of a higher probability of default (PD) associated to borrowers with past adverse credit history that underwent a turnaround process.

The entire portfolio benefits from state guarantees issued by either SACE or FCG (which cover, on average, 88.4% and 82.0% of the loans’ outstanding principal balance, respectively). The unsecured recovery rates have been adjusted to account for the benefit of the guarantee. In its credit analysis, DBRS Morningstar did not give full credit to the guarantee for rating scenarios above BBB (high), in line with the current long-term issuer rating of the Italian sovereign. Moreover, DBRS Morningstar assumed that in all rating scenarios a portion of the guarantee would not be honoured to account for possible rescissions of the guarantee due to noncompliance with its terms. DBRS Morningstar adjusted the guarantees' rescission rates to account for the non-granular nature of the portfolio.

The transaction is exposed to set-off risk, which represents 7.2% of the portfolio, if all borrowers opt to claim the first EUR 100,000 covered by the deposit guarantee scheme. The set-off reserve partially mitigates this risk. DBRS Morningstar factored the set-off reserve in its analysis and assumed a set-off loss of EUR 7.4 million.

The Bank of New York Mellon SA/NV – Milan Branch acts as the account bank for the transaction. Based on the DBRS Morningstar AA (high) long-term public rating of the account bank, the downgrade provisions outlined in the transaction documents, and the 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 ratings assigned, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar determined its ratings based on the principal methodology and the following analytical considerations:

-- DBRS Morningstar determined the PD for the portfolio using the previously mentioned borrower’s private ratings. DBRS Morningstar assumed a weighted-average annualised portfolio PD of 13.1%.
-- The weighted-average life (WAL) of the portfolio is 2.9 years.
-- DBRS Morningstar used the PDs and the WAL as inputs in its SME Diversity Model to generate the hurdle rate for the assigned ratings.
-- DBRS Morningstar determined the recovery rates by giving partial credit to the SACE and FCG guarantees. The weighted-average recovery rate is 42.1% and 59.2% at the A (sf) and B (high) (sf) rating levels, respectively.
-- DBRS Morningstar determined the breakeven rates for the interest rate stresses and default timings using its cash flow tool.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Social (S) Factors
DBRS Morningstar considered the presence of loans backed by the SACE and FCG guarantees to be a significant 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 SACE and FCG guarantee. This is credit positive given the reduced loss expectations for such loans.

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 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: “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 principal methodology.

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 these ratings include the following data provided by the originator directly or through the transaction’s arranger, J.P. Morgan SE:

-- Loan-by-loan characteristics, stratification tables, amortisation profile as of 31 October 2022;
-- Set-off risk exposure as of the portfolio transfer date;
-- Borrower’s private ratings;
-- Terms and conditions of the SACE and FCG guarantees.

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 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.

These ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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

Sensitivity Analysis: 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 13.1%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 42.1% and 59.2% at the A (sf) and B (high) (sf) stress level, respectively, a 10% and 20% decrease in the base case recovery rate. Note that the percentage decreases in the recovery rates 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 downgrade of the Class A Notes to A (low) (sf) or BBB (high) (sf), respectively. 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 downgrade of the Class A Notes to BBB (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 downgrade of the Class B Notes to B (low) (sf) or CCC (high) (sf), respectively. 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 downgrade of the Class B Notes to CCC (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: Carlos Silva, Senior Vice President
Initial Rating Date: 19 December 2022

DBRS Ratings GmbH
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating CLOs Backed by Loans to European SMEs (10 June 2022) and DBRS Morningstar SME Diversity Model v2.6.0.2, https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Cash Flow Assumptions for Corporate Credit Securitizations (26 January 2022), https://www.dbrsmorningstar.com/research/391225/cash-flow-assumptions-for-corporate-credit-securitizations.
-- Rating CLOs and CDOs of Large Corporate Credit (26 January 2022),
https://www.dbrsmorningstar.com/research/391226/rating-clos-and-cdos-of-large-corporate-credit.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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].