DBRS Morningstar Confirms Ratings on Lanterna Mortgage S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) ratings on the Class A1 and Class A2 Notes (the rated notes) issued by Lanterna Mortgage S.r.l. (the Issuer).

The ratings on the Class A1 and Class A2 Notes address the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date.

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

-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the January 2023 payment date.
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the rated notes to cover the expected losses at the AAA (sf) rating level.

The portfolio consists of Italian residential mortgage loans originated by Banca Carige S.p.A. (Carige) and Banca del Monte di Lucca S.pA. (BML), both of which were acquired by BPER Banca. BPER Banca is also the servicer of the portfolio. Zenith Service S.p.A. has been appointed as the backup servicer.

Most of the pool (78.1% as of the September 2022 cut-off date) is assisted by a state guarantee, subsidised through a specific fund (Fondo Prima Casa) and aimed at facilitating the purchase of first properties by households. This first-demand guarantee, released through the state agency CONSAP S.p.A. (CONSAP), covers 50% of the outstanding loan balance (at default).

The Class A1 Notes rank in priority to the Class A2 Notes with respect to both interest and principal payments. Interest on the Class A2 Notes ranks in priority to the principal on the Class A1 Notes. In a post-enforcement scenario, the Class A1 and Class A2 Notes will rank pari passu and pro rata with respect to both interest and principal payments.

PORTFOLIO PERFORMANCE
As of January 2023, loans one to three months delinquent were 0.4% of the outstanding portfolio balance, up from 0.2% in October 2021; the 90+ delinquency ratio was 0.5%, unchanged from last year; and the cumulative default ratio increased to 0.5%, up from 0.3% at the time of the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 19.3% and 15.1%, respectively. The PD and LGD at the AAA (sf) stress scenarios equal 49.7% and 35.1%, respectively.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the rated notes. As of the January 2023 payment date, credit enhancement to the Class A1 and Class A2 Notes was 46.5% and 40.5%, respectively, up from 38.1% and 32.9% at the previous annual review.

The transaction also features a cash reserve available to cover expenses, senior fees, and interest on both the Class A1 and Class A2 Notes. The target cash reserve is equal to 2.5% of the outstanding principal balance of the rated notes (without any floor) and will start amortising from the July 2030 payment date. As of the January 2023 payment date, the cash reserve was at its target level of EUR 4,626,750.

The Bank of New York Mellon SA/NV, Milan Branch acts as the account bank for the transaction. Based on DBRS Morningstar’s AA (high) Long-Term Issuer 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 to the rated 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 loans backed by the CONSAP guarantee to be a relevant rating factor (Social Impact of Product & Services) as outlined in “DBRS Morningstar’s Approach to Environmental, Social and Governance Risk Factors in Credit Ratings” framework. DBRS Morningstar assumed reduced loss severities for the loans backed by the CONSAP guarantee as outlined in its “European RMBS Insight: Italian Addendum” methodology. While this is credit positive, it did not affect the rating on the rated notes.

There were no Environmental or Governance factors that had a significant or relevant impact 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.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

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.

A review of the transaction 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 these ratings include transaction reports provided by The Bank of New York Mellon SA/NV, Milan Branch; servicer reports and other additional information provided by BPER Banca; 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 purpose 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 this transaction took place on 18 February 2022, when DBRS Morningstar confirmed its AAA (sf) ratings on the Class A1 and Class A2 Notes.

The lead analyst responsibilities for this transaction have been transferred to Baran Cetin.

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 pool 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 the credit ratings.
-- The base case PD and LGD of the current pool of loans for the Issuer are 19.3% and 15.1%, 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. For example, if the LGD increases by 50%, the rating on Class A1 Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating on Class A1 Notes would be expected to fall to A (low) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on Class A1 Notes would be expected to fall to A (low) (sf).

Class A1 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (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 A (low) (sf)

Class A2 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (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 A (low) (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: Baran Cetin, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 31 July 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 this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-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.
-- 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.
-- 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.
-- European RMBS Insight Methodology (28 March 2022) and European RMBS Insight Model v 5.7.1.0, https://www.dbrsmorningstar.com/research/394309/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (29 September 2022), https://www.dbrsmorningstar.com/research/403237/european-rmbs-insight-italian-addendum.

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].