DBRS Morningstar Upgrades Rating on Emilia SPV S.r.l. Following Amendment

DBRS Ratings GmbH (DBRS Morningstar) upgraded to A (high) (sf) from A (sf) its rating on the Class A Notes issued by Emilia SPV S.r.l. (the Issuer) following a transaction amendment (the Amendment).

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in February 2064.

The upgrade follows a transaction review upon the execution of an amendment and is based on the following analytical considerations:
-- The Amendment to the transaction executed on 20 April 2023;
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the February 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 Class A Notes to cover the expected losses at the A (high) (sf) rating level; and
-- No purchase termination events or breach of transfer limits have occurred to date.

The transaction is a revolving securitisation of first-lien residential mortgage loans granted by Credito Emiliano S.p.A. (CREDEM) to individuals and families resident in Italy. CREDEM services the portfolio and also covers the role of the account bank while Banca Finanziaria Internazionale S.p.A. acts as the backup servicer facilitator. The transaction initially closed in April 2015 when the Class A and Class B Notes were issued for nominal amounts of EUR 3 billion and EUR 900 million, respectively.

The structure provides for partially paid notes that can be subscribed up to their nominal amounts to finance the purchase of subsequent portfolios. The notes can amortise during the replenishment period if certain conditions are met. Since the issue date, eight subsequent portfolios were sold to the Issuer, seven of which were financed with further notes subscriptions. The Class A Notes subordination during the replenishment period is based on a dynamic credit enhancement mechanism, depending on the credit quality of the pool in terms of loan-to-value (LTV) and portfolio yield. In general, the credit enhancement to the Class A Notes can vary during the replenishment period as the Issuer purchases further portfolios, but can never decrease below the contractual floor of 18.5%.

The revolving period was extended for five years when the transaction was amended in March 2021, and it is currently scheduled to end on the May 2026 payment date. At the same time, several changes were made to the transfer limits. For more information please refer to https://www.dbrsmorningstar.com/issuers/20785.

On 30 January 2023, a written resolution was executed to address wrong calculations made on the cash reserve required amount. The calculations overstated the required amount on the cash reserve, relating to the set-off exposure. The excess amount of EUR 65,729,050.97 will be cleared in two stages: on the February 2023 payment date, EUR 8,469,570.68 was made available as part of the interest available funds while the remaining EUR 57,259,480.29 will be part of the interest available funds on the May 2023 payment date, clearing all excess amounts on the cash reserve account.

THE AMENDMENT
The Amendment was executed on and is effective as of 20 April 2023. The changes are summarised below:
-- A decrease in the maximum rate of interest applicable to the Class A Notes to 1.00% from 4.00%.
-- A change in certain transfer limits applicable during the replenishment period, with respect to the aggregate portfolio:
(1) The maximum contribution of loans with a fixed or optional interest rate increased to 95% from 75%;
(2) The minimum contribution of loans with a floating interest rate up to maturity decreased to 5% from 20%.

PORTFOLIO PERFORMANCE
The portfolio is performing within DBRS Morningstar’s expectations. As of the 31 December 2022 portfolio cut-off date, delinquencies were low, with 90+ days arrears representing 0.03% of the portfolio performing balance, slightly down from 0.04% as of 31 December 2021, while no defaults were recorded so far. As of the same cut-off date, the current LTV was 56.2%, slightly down from 57.4% at the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the pool of receivables and, given the presence of a revolving period, continues to derive its base case PD and LGD assumptions based on a worst-case portfolio composition as per the replenishment criteria set forth in the transaction legal documents.

Given the revolving nature of the transaction and its dynamic credit enhancement features, DBRS Morningstar continued to consider four portfolios based on the weighted-average LTV but slightly updated its base case PD and LGD assumptions, based on the December 2022 pool cut, as follows:
-- 11.0% and 19.5%, respectively, for the worst-case portfolio with 75% LTV.
-- 11.2% and 21.8%, respectively, for the worst-case portfolio with 80% LTV.
-- 11.4% and 24.0%, respectively, for the worst-case portfolio with 85% LTV.
-- 11.6% and 26.0%, respectively, for the worst-case portfolio with 90% LTV.

To capture certain adverse characteristics that the pool might develop during the replenishment period, DBRS Morningstar increases the risk segment of each loan to a higher segment than otherwise would have been calculated for each loan.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the Class A Notes. Credit enhancement will dynamically change based on the credit quality of the pool in terms of LTV and portfolio yield, but will never decrease below the contractual floor of 18.5%. As of the February 2023 payment date, the Class A Notes credit enhancement was at the floor of 18.5%.

The transaction benefits from a cash reserve, which provides liquidity support and is available to cover senior fees and interest payments on the Class A Notes. The reserve is amortising and, as of the February 2023 payment date, its balance was equal to EUR 141.3 million, above the target level by EUR 57.3 million. As mentioned earlier, the excess amount will be cleared on the May 2023 payment date.

CREDEM acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on CREDEM, the downgrade provisions outlined in the transaction documents, and 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 rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction’s structure in Intex DealMaker.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental /Social/ 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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the rating are the “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology, and the “European RMBS Insight Methodology” (27 March 2023), https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

DBRS Morningstar has applied the principal methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.

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, consisting of the Master Amendment Agreement.

A review of the transaction’s any other 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 provided by CREDEM, and loan-level data provided by the European DataWarehouse GmbH. In the context of the Amendment, DBRS Morningstar was also provided with additional information by Société Générale, the arranger.

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 March 2022, 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 rating (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 credit ratings.

-- The base case PD and LGD of the current pool of loans for the Issuer are: 11.0% and 19.5%, respectively, for the constructed portfolio with 75% LTV; 11.2% and 21.8%, respectively, for the constructed portfolio with 80% LTV; 11.4% and 24.0%, respectively, for the constructed portfolio with 85% LTV; and 11.6% and 26.0%, respectively, for the constructed portfolio with 90% LTV.

-- 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 constructed portfolio with 75% LTV as an example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to remain at 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 remain at 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).

Class A Notes Risk Sensitivity (based on the constructed portfolio with 75% LTV):

-- 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 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 (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)

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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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: 22 April 2015

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The rating methodologies used in the analysis of these transactions 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.
-- 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.
-- 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.
-- 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.
-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight Model v.5.7.1.0, https://www.dbrsmorningstar.com/research/411634/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].