Press Release

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

Structured Credit

February 28, 2023

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

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 a transaction review upon the execution of an amendment extending the revolving period by an additional 36 months to March 2026 from March 2023, which is effective on 28 February 2023. Additionally, the confirmation is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the December 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 the A (sf) rating level; and
-- No purchase termination events or breach of purchase conditions have occurred 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, entrepreneurs, artisans, and producer families by Intesa Sanpaolo S.p.A. (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 was structured with a revolving period, now scheduled to end in March 2026. However, the revolving period will terminate prematurely 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, totaling EUR 4.0 billion and accounting for 50.7% of the current portfolio performing balance.

Around 84.0% 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 86.6%, quite stable since the closing date. The recovery rates have been adjusted 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 October 2022 portfolio cut-off date, delinquencies were low, with 90+ days arrears representing 0.7% of the outstanding portfolio balance, slightly up from 0.6% as of 31 July 2022. The gross cumulative default ratio stood at 0.4% of the initial portfolio balance, slightly up from 0.3% at the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar based 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 respect to the portfolio assumed to be reinvested during the revolving period.

Furthermore, DBRS Morningstar revised its stressed lifetime default and recovery assumptions to 37.7% and 22.3%, respectively, at the A (sf) rating level. The recovery rates continue to be determined 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 December 2022 payment date, credit enhancement to the Class A Notes was 34.0%, 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 was at its target of EUR 112 million.

The transaction is structured with an additional cash reserve, funded upon 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 DBRS Morningstar’s account bank reference rating on ISP of A (low), which is one notch below its 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 significant social 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 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 affects the rating, as the lifetime assumptions of the stressed portfolio have worsened compared with the previous annual review, making the rating output more 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.

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), https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes.

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.

DBRS Morningstar has conducted a review of the transaction’s legal documents provided in the context of the amendment. A review of any other transaction’s legal documents was not conducted as the 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 took place on 23 November 2022, when DBRS Morningstar confirmed its A (sf) rating on the Class A Notes.

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 22.3% 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 on the Class A Notes to A (low) (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 downgrade on the Class A Notes to 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.

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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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.

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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