DBRS Morningstar Confirms Ratings on Three Italian Salary Assignment Transactions

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on several classes of notes issued in the context of three Italian salary assignment transactions:

Eridano II SPV S.r.l. (E2):
-- Class A Asset-Backed Floating-Rate Notes at AA (low) (sf)
-- Class B Asset-Backed Floating-Rate Notes at A (high) (sf)

Progetto Quinto S.r.l. (PQ):
-- Class A Notes at AA (low) (sf)

Pelmo S.r.l. (Pelmo):
-- Class A Notes at AA (low) (sf)
-- Class B Notes at A (sf)
-- Class C Notes at A (low) (sf)

The ratings on all Class A Notes address the timely payment of interest and the ultimate payment of principal by the respective final maturity dates. The ratings on all other classes of notes address the ultimate payment of interest and the ultimate payment of principal by the respective final maturity dates while the relevant bond is subordinated, but the timely payment of interest when the bond becomes the most-senior tranche, in accordance with the Issuer’s default definition in the transaction documents.

The rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performances, in terms of delinquencies, defaults, and losses, as of the respective latest payment dates;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective rating levels.

PORTFOLIO PERFORMANCE
The three portfolios are currently performing within DBRS Morningstar’s initial expectations.

As of the latest cut-off dates, the 90+-day arrears and gross cumulative default ratios were as follows:
-- E2: 1.1% and 0.5%, respectively
-- PQ: 0.4% and 3.1%, respectively
-- Pelmo: 0.4% and 2.5%, respectively

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pools of receivables and updated its base case PD and LGD assumptions as follows:
-- E2: 8.7% and 6.5%, respectively
-- PQ: 8.1% and 11.0%, respectively
-- Pelmo: 8.6% and 10.7%, respectively

The changes in DBRS Morningstar’s PD and LGD assumptions compared with the previous annual reviews were driven by portfolio deleveraging and/or changes in the pool compositions.

CREDIT ENHANCEMENT
Credit enhancement to the rated notes is provided by overcollateralisation of the outstanding portfolio balance.

As of the latest payment dates, credit enhancement levels were as follows compared with the latest annual review in January 2022:
-- E2 – Class A Asset-Backed Floating-Rate Notes: 20.2%, up from 14.1%
-- E2 – Class B Asset-Backed Floating-Rate Notes: 8.0%, up from 5.2%
-- PQ – Class A Notes: 19.2%, up from 14.5%
-- Pelmo – Class A Notes: 16.2%, slightly up from 15.4%
-- Pelmo – Class B Notes: 8.3%, slightly up from 7.4%
-- Pelmo – Class C Notes: 5.4%, slightly up from 4.4%

All transactions benefit from cash reserves, available to cover senior fees and expenses, swap payments (if any), and interest payments on the Class A, Class B (if any), and Class C Notes (if any). Various performance-related triggers are in place to defer the interest on subordinated notes upon portfolio deterioration. Cash trapping conditions are also in place to trap the excess spread upon the breach of certain triggers.

With respect to Pelmo, performance thresholds are established to trigger the irreversible sequential amortisation of the rated notes (currently repaying on a pro rata basis), with the Class A Notes paid in priority to the Class B Notes and the Class B Notes paid in priority to the Class C Notes.

E2 also benefits from a prepayment reserve, available to cover losses arising from the set-off of capitalised fees.

All reserves were at their target levels as of the latest payment dates.

BNP Paribas Succursale Italia acts as the account bank for E2 and PQ while BNY Mellon SA/NV, Milan Branch acts as the account bank for Pelmo. Based on DBRS Morningstar’s private/public ratings on the account banks, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in each transaction’s structure, DBRS Morningstar considers the risk arising from the exposure to the account banks to be consistent with the ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Société Générale, S.A. acts as the swap counterparty for E2 while BNP Paribas SA acts as the swap counterparty for PQ and the cap counterparty for Pelmo. DBRS Morningstar’s public ratings on the swap/cap counterparties are consistent with the first and second rating thresholds, as defined in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology. The swap documents are compliant with the same methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General Considerations

Environmental (E) Factors
There were no Environmental factors that had a significant or relevant effect on the credit analysis.

Social (S) and Governance (G) Factors
The high exposure to public-sector employees, pensioners, and civil servants makes these transactions dependent on the creditworthiness of the Italian sovereign. DBRS Morningstar considers some of the key drivers behind the latest rating action on Italy – namely Human Capital and Human Rights (S) and Institutional Strength, Governance & Transparency (G) – to be significant rating factors. According to the IMF Word Economic Outlook, Italy’s GDP per capita of USD 35,473 in 2021 was low compared with its euro area peers. At the same time, according to the World Bank, Italy ranked for Governance Effectiveness at 64.9th percentile in 2021. DBRS Morningstar took these factors into account in the “Economic Structure and Performance”, “Fiscal Management and Policy”, and “Political Environment” building blocks of its “Global Methodology for Rating Sovereign Governments”.

Credit rating actions on the Republic of Italy are likely to have an impact on these credit ratings. ESG factors that have a significant or relevant effect on the credit analysis of the Republic of Italy are discussed separately at https://www.dbrsmorningstar.com/research/404515/dbrs-morningstar-confirms-republic-of-italy-at-bbb-high-stable-trend.

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.

DBRS Morningstar analysed the transactions’ structures in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to these ratings is the “Master European Structured Finance Surveillance Methodology” (21 December 2022), https://www.dbrsmorningstar.com/research/407695/master-european-structured-finance-surveillance-methodology.

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 principal methodology.

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/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:
-- For E2, servicer reports provided by ViViBanca S.p.A. and investor reports provided by Banca Finanziaria Internazionale S.p.A.
-- For PQ, servicer reports provided by Banca Progetto S.p.A. and investor reports provided by Banca Finanziaria Internazionale S.p.A.
-- For Pelmo, servicer reports provided by Sigla S.r.l. and investor reports provided by Banca Finanziaria Internazionale S.p.A.
-- For all transactions, 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 actions on these transactions took place on 27 January 2022, when:
-- For E2, DBRS Morningstar confirmed its ratings on the Class A and Class B Asset-Backed Floating-Rate Notes at AA (low) (sf) and A (high) (sf), respectively.
-- For PQ, DBRS Morningstar confirmed its rating on the Class A Notes at AA (low) (sf).
-- For Pelmo, DBRS Morningstar confirmed its ratings on the Class A, Class B, and Class C Notes at AA (low) (sf), A (sf), and A (low) (sf), respectively.

The lead analyst responsibilities for these transactions 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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the base case):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pools based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.

-- E2: 8.7% and 6.5%, respectively
-- PQ: 8.1% and 11.0%, respectively
-- Pelmo: 8.6% and 10.7%, respectively

-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. Taking the Class A Notes of E2 as an example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to fall to A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A Notes would be expected to fall to A (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to fall to A (sf).

E2:
Class A Asset-Backed Floating-Rate Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (sf)

Class B Asset-Backed Floating-Rate Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

PQ:
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Pelmo:
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (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: Pascale Kallas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates:
-- E2: 5 October 2020
-- PQ: 16 April 2021
-- Pelmo: 15 June 2021

DBRS Ratings GmbH
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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.

-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (21 December 2022), https://www.dbrsmorningstar.com/research/407695/master-european-structured-finance-surveillance-methodology.
-- 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.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (19 October 2022), https://www.dbrsmorningstar.com/research/404212/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (15 July 2022), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-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.
-- 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: 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].