DBRS Morningstar Upgrades Credit Ratings on Sunrise SPV 20 S.r.l. - Sunrise 2022-2

DBRS Ratings GmbH (DBRS Morningstar) upgraded its credit ratings on the notes (the rated notes) issued by Sunrise SPV 20 S.r.l. - Sunrise 2022-2 (the Issuer) as follows:

-- Class A Notes to AAA (sf) from AA (high) (sf)
-- Class B Notes to AA (high) (sf) from AA (sf)
-- Class C Notes to AA (low) (sf) from A (sf)
-- Class D Notes to BBB (high) (sf) from BBB (sf)
-- Class E Notes to BBB (sf) from BBB (low) (sf)

The credit ratings on the Class A and Class B Notes address the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date in August 2047. The credit ratings on the Class C, Class D, and Class E Notes address the ultimate payment of interest, but the timely payment of scheduled interest when they become the most senior tranche, and the ultimate repayment of principal on or before the legal final maturity date.

The upgrades 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 July 2023 payment date;
-- 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 credit rating levels.

The transaction is a securitisation of unsecured Italian consumer loan receivables underwritten to retail clients and originated by Agos Ducato S.p.A., which also acts as the servicer for the transaction portfolio. As of the July 2023 payment date, the EUR 1.1 billion portfolio comprised new and used auto loans, personal loans, furniture loans, and other-purpose loans. The majority of loans in the portfolio (70.4%) are flexible loans that allow the borrower to skip one monthly instalment per year (up to a maximum of five times during the life of the loan) and modify the monthly instalment amounts. The transaction closed in September 2022 and includes an initial 14-month revolving period, which is scheduled to end on the November 2023 payment date.

PORTFOLIO PERFORMANCE
As of the July 2023 payment date, loans that were one to two months and two to three months delinquent represented 0.4% and 0.2% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.4%. Gross cumulative defaults amounted to 0.8% of the aggregate original portfolio balance, with cumulative recoveries of 1.3% to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar received updated historical vintage data from the originator and updated its base case PD and LGD assumptions to 5.2% and 90.2%, from 6.7% and 87.6% at closing, respectively. The analysis continues to be based on the potential portfolio migration based on replenishment criteria set forth in the transaction legal documents. The upgrades are driven by the improved net loss assumptions combined with the increased credit enhancement.

CREDIT ENHANCEMENT
The subordination of the respective junior obligations and the cash reserve provides credit enhancement to the rated notes. As of the July 2023 payment date, credit enhancements to the Class A Notes, Class B Notes, Class C Notes, Class D Notes, and Class E Notes were 31.3%, 21.4%, 13.8%, 9.6%, and 7.0%, respectively, up from 29.3%, 19.4%, 11.8%, 7.6%, and 5.0% at closing, respectively. The increase in credit enhancements is due to the increase in the cash reserve amount since closing.

The transaction benefits from several funded reserves. The nonamortising payment interruption risk reserve account with a current balance of EUR 9.9 million is available to cover senior expenses and interest payments on the rated notes, providing liquidity support to the transaction. Credit support is provided through an amortising cash reserve with a target balance equal to 2.5% of the outstanding performing collateral principal. The current balance of the cash reserve is EUR 27.4 million, which can be used to offset the principal losses of defaulted receivables. All reserves are currently at their target levels.

The transaction structure additionally provisions for a rata posticipata cash reserve, which mitigates the liquidity risk arising from flexible loans. This reserve will only be funded if, for two consecutive payment dates, the outstanding balance of the flexible loans in relation to which the debtors have exercised the contractual right to postpone the payments is higher than 5% of the outstanding balance of all flexible loans. As of the July 2023 payment date, this condition had not been breached.

Crédit Agricole Corporate & Investment Bank (CA-CIB), Milan Branch is the account bank for the transaction. Based on DBRS Morningstar’s private rating on CA-CIB, 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 credit ratings assigned to the rated notes.

CA-CIB is also the swap counterparty for the transaction, which meets the criteria to act in such capacity based on its private rating. The downgrade provisions outlined in the transaction documents are consistent with DBRS Morningstar’s criteria with respect to a swap provider.

DBRS Morningstar’s credit rating on the rated notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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/416784/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 credit 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.

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 continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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 credit ratings include investor reports provided by CA-CIB and loan-level data provided by the European DataWarehouse GmbH. In the context of a newer transaction from the same originator, DBRS Morningstar received updated historical performance data as follows:
-- Static prepayment rates by annual vintages from 2003 to 2023;
-- Monthly dynamic arrears from June 2008 to June 2023;
-- Quarterly static default vintage analysis from Q1 2012 to Q2 2023; and
-- Quarterly recovery data vintage analysis from Q1 2012 to Q2 2023.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit ratings, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 13 September 2022, when DBRS Morningstar assigned new credit ratings to the Class A Notes, Class B Notes, Class C Notes, Class D Notes, and Class E Notes at AA (high) (sf), AA (sf), A (sf), BBB (sf), and BBB (low) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Preben Cornelius Overas.

Information regarding DBRS Morningstar credit 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 credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit 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 credit ratings.
-- The base case PD and LGD of the pool of loans for the Issuer are 5.2% and 90.2%, respectively.
-- The risk sensitivity overview below illustrates the credit 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 credit rating on the Class A Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the credit rating on the Class A Notes would be expected to fall to AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the credit rating on the Class A Notes would be expected fall to AA (sf).

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

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

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

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

Class E Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of BBB (sf)
-- 50% increase in LGD, expected credit rating of BBB (sf)
-- 25% increase in PD, expected credit rating of BBB (sf)
-- 50% increase in PD, expected credit rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BBB (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BB (high) (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://registers.esma.europa.eu/cerep-publication. 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 credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Preben Cornelius Overas, Assistant Vice President
Credit Rating Committee Chair: David Lautier, Senior Vice President
Initial Credit Rating Date: 13 September 2022

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 credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/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.
-- 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.
-- 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 2023), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- 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.
-- Derivative Criteria for European Structured Finance Transactions (16 June 2023),
https://www.dbrsmorningstar.com/research/415976/derivative-criteria-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023),
https://www.dbrsmorningstar.com/research/416784/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].