Press Release

DBRS Morningstar Assigns Ratings to Centro delle Alpi SME S.r.l.

Structured Credit

June 16, 2023

DBRS Ratings GmbH (DBRS Morningstar) assigned ratings to the notes issued by Centro delle Alpi SME S.r.l. (CdA SME or the Issuer) as follows:

-- EUR 941,600,000 Class A1 Asset-Backed Floating-Rate Notes due July 2060 (the Class A1 Notes) at A (sf)
-- EUR 73,000,000 Class A2 Asset-Backed Fixed-Rate Notes due July 2060 (the Class A2 Notes) at A (sf)
-- EUR 1,182,000,000 Class A3 Asset-Backed Floating-Rate Partly Paid Notes due July 2060 (the Class A3 Notes) at A (sf) -- EUR 91,600,000 Class A4 Asset-Backed Fixed-Rate Partly Paid Notes due July 2060 (the Class A4 Notes and, together with the Class A1, Class A2 and Class A3 Notes, the Class A Notes) at A (sf)
-- EUR 288,000,000 Class M Asset-Backed Floating-Rate Partly Paid Notes due July 2060 (the Class M Notes and, together with the Class A Notes, the Rated Notes) at BB (high) (sf)

The ratings on the Class A Notes address the timely payment of interest and the ultimate repayment of principal by the legal final maturity date, while the rating on the Class M Notes addresses the ultimate payment of interest and the ultimate repayment of principal by the legal final maturity date. The Issuer also issued EUR 623,773,000 Class J Asset-Backed Fixed-Rate and Variable Return Partly Paid Notes due July 2060 (the Class J Notes and, together with the Class A3, the Class A4, and the Class M Notes, the Partly Paid Notes and, together with the Class A Notes and the Class M Notes, the Notes), which DBRS Morningstar did not rate.

CdA SME is a revolving cash flow securitisation collateralised by a portfolio of mortgage and unsecured loans to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. The loans were granted by Banca Popolare di Sondrio S.p.A. (PopSo), that will also service the portfolio.

As of the initial valuation date of 31 May 2023, the portfolio comprised 23,824 loans extended to 20,144 borrowers, with an aggregate outstanding principal balance equal to EUR 1,539,440,949. The initial pool is composed of 40.9% mortgage loans, 44.8% unsecured loans benefiting from a Fondo Centrale di Garanzia (FCG) guarantee, and 14.3% unsecured loans without any guarantee. Around 0.2% of the initial portfolio was in arrears for 30 days or less as of the initial valuation date.

The transaction is structured with a 24-month ramp-up period, scheduled to end in June 2025 (included), during which PopSo may sell new receivables to the Issuer subject to certain eligibility criteria and concentration limits. Additionally, the ramp-up period will terminate early if certain performance and non-performance based trigger events occur. During the ramp-up period, the purchase of new receivables will be funded through portfolio collections and/or via further instalment payments under the Partly Paid Notes. The subscription of further Partly Paid Notes will be subject to the maintenance of minimum subordination levels, as per the transaction documents.

The Partly Paid Notes were subscribed up to the following amounts at transaction closing:
-- Class A3 Notes at EUR 104,611,990
-- Class A4 Notes at EUR 8,108,905
-- Class M Notes at EUR 141,886,440
-- Class J Notes at EUR 307,308,665

The transaction features a cash reserve, which will be available to the Issuer to cover shortfalls in expenses, senior fees, and interest payments on the Class A Notes and, prior to the occurrence of a Class M Notes Interest Subordination Event, on the Class M Notes. The cash reserve was fully funded at transaction closing using the proceeds from the subscription of the Notes, and its target amount is equal to the greater of (i) 2.0% of the Class A Notes and (ii) 1.44% of the performing outstanding portfolio (not considering the further portfolio transferred on the relevant payment date), with a floor at EUR 5,636,604. Any increase in the cash reserve during the ramp-up period will be funded through further instalment payments under the Partly Paid Notes.

At transaction closing, total credit enhancements available to the Class A and the Class M Notes were 26.8% and 17.6%, respectively, which was provided by the asset portfolio. DBRS Morningstar deems the cash reserve to provide credit enhancement only on the payment date when the rated notes can be repaid in full. The transaction is structured in a way such that minimum credit enhancement levels must be maintained during the ramp-up period, if further instalment payments under the Partly Paid Notes are made. If the Issuer does not use portfolio collections to purchase additional assets during the ramp-up period, these proceeds will be instead directed towards amortisation of the Notes.

The initial portfolio is concentrated in northern Italy and specifically in the Lombardy region, which accounts for 69.1% of the initial pool (the second and the third most represented regions are Lazio and Veneto, accounting for 10.5% and 5.7% of the pool, respectively). The initial portfolio also shows a moderate level of industry concentration, with the top sector as per DBRS Morningstar’s industry classifications being building & development (27.3% of the initial pool). The pool is sufficiently granular with low borrower concentration. The top one, ten, and 50 borrowers account for 1.0%, 5.3%, and 13.0% of the outstanding principal balance, respectively. Purchase conditions are in place to control for geography, industry and borrower concentrations during the ramp-up period.

DBRS Morningstar based its analysis on a stressed portfolio created considering the scheduled amortisation plan of the initial portfolio and the various purchase conditions applying either on the aggregate or on subsequent portfolios. DBRS Morningstar assumed that, at the end of the ramp-up period, the portfolio would comprise 95.0% unsecured loans and 5.0% mortgage loans, taking into account that mortgage loans cannot be transferred during the ramp-up period. A stressed portfolio weighted-average life (WAL) was derived by applying the purchase conditions and was assumed to be equal to 4.3 years.

Following the analysis of historical performance data provided by PopSo, DBRS Morningstar considered base case annualised PDs of 3.4% and 2.1%, for mortgage and unsecured loans, respectively.

The purchase conditions require that the amount of loans benefitting from the FCG guarantee during the ramp-up period be at least 55.0% of the aggregate unsecured portfolio and that the weighted average guarantee coverage be at least 70.0%. DBRS Morningstar adjusted the recovery rates to account for the benefit of the guarantee. DBRS Morningstar did not give full credit to the guarantee for rating scenarios above BBB (high) (sf), in line with the current long-term issuer rating on the Italian sovereign. Moreover, DBRS Morningstar assumed that in all rating scenarios a portion of the guarantee claims would be rejected due to noncompliance with the terms.

The transaction is exposed to set-off risk, which represents 9.0% of the initial portfolio, if all borrowers opt to claim the first EUR 100,000 covered by the deposit guarantee scheme, however, the purchase conditions cap the set-off risk exposure during the ramp-up period at 13.0%. DBRS Morningstar assumed a set-off loss of 6.5% in its analysis, as DBRS Morningstar typically considers 50.0% of the maximum set-off exposure for rating levels below AA (low) (sf). The amount was considered as net loss and deducted from the portfolio balance.

BNP Paribas, Italian Branch (BNPP) was appointed as the Issuer account bank and paying agent. Based on DBRS Morningstar’s private ratings on BNPP, the downgrade provisions outlined in the transaction documents, and other mitigating factors 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.

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 historical performance information supplied. DBRS Morningstar assumed annualised PDs of 3.4% and 2.1%, for mortgage and unsecured loans, respectively.
-- The WAL of the portfolio was assumed to be 4.3 years.
-- DBRS Morningstar used the PDs and WAL as inputs in its SME Diversity Model to generate the hurdle rate for the assigned ratings.
-- DBRS Morningstar determined the recovery rate by considering the market value declines for Europe, the security level, the collateral type, and by giving partial credit to the FCG guarantee. The weighted-average recovery rate is 37.1% and 47.9% at the A (sf) and BB (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 FCG guarantee 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 FCG guarantee. This is credit positive given the reduced loss expectations for FCG-guaranteed 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.

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 ratings is: “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.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with 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 considers potential portfolio migration based on the replenishment criteria set forth in the transaction legal documents.

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 historical performance data provided by the PopSo directly, or through the arranger, Banca Finanziaria Internazionale S.p.A.

DBRS Morningstar received the following data information, split by amount/number of loans and by mortgage/non-mortgage loans:
-- Quarterly dynamic arrears data from Q12010 to Q42022,
-- Quarterly static default data from Q12010 to Q42022,
-- Quarterly dynamic default data from Q12010 to Q42022,
-- Quarterly static recovery data from Q12010 to Q42022,
-- Quarterly dynamic prepayment data from Q12010 to Q42022.

In addition, DBRS Morningstar received loan-level information, stratification tables, contractual amortisation profile, and data on set-off exposure as of 31 May 2023. DBRS Morningstar also received information on claims to the FCG covering the period 2015-2022.

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 PDs of 3.4% and 2.1%, for mortgage and non-mortgage loans, respectively, a 10% and 20% increase on the base case PD.
-- Recovery rates Used: Base case recovery rates of 37.1% and 47.9% at the A (sf) and BB (high) (sf) rating levels, respectively, 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 of 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).

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 M Notes to BB (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 M Notes to BB (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: http://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.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Ilaria Maschietto, Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 16 June 2023

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: http://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: 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].

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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