Press Release

DBRS Morningstar Assigns Credit Ratings to Leone Arancio RMBS S.r.l.

RMBS

September 12, 2023

DBRS Ratings GmbH (DBRS Morningstar) assigned credit ratings to the residential mortgage-backed notes issued by Leone Arancio RMBS S.r.l. (the Issuer) as follows:

-- Class A1 notes at AAA (sf)
-- Class A2 notes at AAA (sf)

The credit ratings on the Class A1 and Class A2 notes (together, the Class A notes) address the timely payment of interest and the ultimate repayment of principal.

CREDIT RATING RATIONALE
The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the Republic of Italy. The Issuer will use the proceeds of the notes to fund the purchase of prime Italian residential mortgage loans secured over properties located in Italy.

This is the third securitisation from ING Bank, Milan Branch (ING Bank Italy), and it will use the same legal special-purpose entity as its predecessor, a Residential Mortgage Backed Securities (RMBS) transaction that repaid early in April 2023. The initial mortgage portfolio consists of about EUR 6.49 billion of first-lien mortgage loans collateralised by residential properties in Italy. The mortgages were mostly granted between 2011 and 2023, with more than 50% originated on or after 2018. The transaction will include a revolving period from closing in September 2023 to the first payment date falling in October 2026. Additionally, ING Bank Italy will be allowed to sell additional eligible assets to the Issuer up to EUR 1.51 billion, limited to not more than EUR 750 million per year.

ING Bank Italy will service the mortgage loans. DBRS Morningstar reviewed both the originator and the servicer on an operational visit to the Milan office in May 2023. Underwriting guidelines are in accordance with market practices observed in Italy.

As of 31 May 2023, a proportion of the loans in the portfolio (43.3% in terms of outstanding balance) was originated via brokers with underwriting fully performed internally. The weighted-average coupon of the portfolio is 4.0%, with about 49% of the loans in the pool being floating-rate loans for life and the remaining 51% comprising either fixed-rate loans for life or adjustable-rate loans. The latter pay a fixed-rate coupon for a pre-defined period that lasts between five and 10 years. After that, borrowers can decide to either maintain the fixed rate or switch to a floating rate for the following five to 10 years of the mortgage loan (the same process will be repeated until the maturity of the loan, every five- to 10-year period). Floating-rate loans for life are mostly indexed to three-month Euribor and one-month Euribor with a small portion indexed to the European Central Bank (ECB) base rate. In contrast, the notes are all floating rate linked to three-month Euribor. In order to hedge the Issuer’s interest rate and basis risk exposure there is an interest rate swap agreement with ING Bank Italy that contains downgrade and collateral-posting language in line with DBRS Morningstar criteria. There were no loans in the mortgage portfolio in arrears at closing.

Liquidity in the transaction is provided by a liquidity facility (LF), which the Issuer can use to pay shortfalls in senior costs, swap payments, and interest on the rated notes, if any. The LF is granted by ING Bank Italy and is sized at 1% of the total nominal amount of the portfolio.

Credit enhancement for the Class A notes is calculated at 11.5% and is provided by the subordination of the Class J notes, which DBRS Morningstar does not rate. Prior to an event of default and upon termination of the revolving period, principal receipts will be used to repay Class A1 principal until Class A1 is fully redeemed. Once Class A1 has been fully redeemed, principal receipts will be used to repay Class A2 principal until Class A2 is fully redeemed. Additionally, the transaction includes a provisioning mechanism, which will capture excess spread in the interest priority of payments to be used for principal amortisation when losses occur.

All borrower payments are collected by ING Bank Italy under a direct debit scheme and deposited into the servicer account at ING Bank Italy. Payments are transferred from the servicer account to an account held at ING Bank N.V (the Issuer Account Bank) no later than the 6th of the month following two months after a monthly collection period ends, giving rise to two months of holding collection periods. If the servicer is downgraded below BBB (low), the Issuer will open as soon as reasonable and practicable and not later than 14 calendar days, an escrow account in the name of the Issuer with an institution rated at least "A" and transfer to such account the highest monthly collections balance over the previous six months. The escrow account aforementioned will no longer be required if (1) borrowers are notified to make payments directly into the Issuer account bank, (2) the servicer transfers collections daily to the Issuer account bank, (3) collection transfers to be made by the servicer into the Issuer Account Bank are guaranteed by an unlimited and unconditional guarantee from an institution rated at least "A", or (4) if the servicer took such other action that would result in no credit rating impact.

ING Bank N.V. is the Issuer Account Bank for the transaction. DBRS Morningstar’s credit rating on ING Bank N.V. in its role as Issuer Account Bank is consistent with the threshold for the account bank as outlined in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, given the credit ratings assigned to the notes.

CREDIT RATING RATIONALE
DBRS Morningstar based its credit ratings on the following analytical considerations:
-- The transaction capital structure and the form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS Morningstar received historical mortgage performance data as well as loan-level data for the mortgage portfolio. DBRS Morningstar calculated probability of default (PD), loss given default (LGD), and expected loss levels on the mortgage portfolio, which it uses as inputs in the cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “European RMBS Insight Methodology” and “European RMBS Insight: Italian Addendum”.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the Noteholders according to the terms and conditions in the transaction documents. DBRS Morningstar analysed the transaction structure using Intex DealMaker. DBRS Morningstar considered additional sensitivity scenarios of 0% conditional repayment rate stress.
-- The transaction parties’ financial strength to fulfil their respective roles and the structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as a downgrade and replacement language in the transaction documents.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology as well as the appropriate legal opinions that address the assignment of the assets to the Issuer.
-- DBRS Morningstar’s sovereign rating on the Republic of Italy at “BBB (high)” with a Stable trend as of the date of this press release.

DBRS Morningstar’s credit ratings on the Class A notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the notes are the related interest payment amounts and the related principal payment amounts.

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 using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is “European RMBS Insight: Italian Addendum” (29 September 2022), https://www.dbrsmorningstar.com/research/403237/european-rmbs-insight:-italian-addendum.

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.

Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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.

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 static historical performance data covering from Q1 2012 to Q4 2022, dynamic performance data from February 2013 to February 2023, and dynamic prepayments data from August 2004 to January 2023. The sources of information also include loan-level data as at 31 May 2023 for the mortgage portfolio as provided by the arranger.

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

DBRS Morningstar was supplied with one or more 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.

These credit ratings concern newly issued financial instruments. These are the first DBRS Morningstar credit ratings on these financial instruments.

Information regarding DBRS Morningstar credit 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 credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the Base Case):

-- In respect of the Class A1 notes, the PD of 33.1% and LGD of 31.2%, corresponding to a AAA (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class A2 notes, the PD of 33.1% and LGD of 31.2%, corresponding to an AAA (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.

Class A1 Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to the rating on the Class A1 notes being confirmed at AAA (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to the rating on the Class A1 notes being confirmed at AAA (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to the rating on the Class A1 notes being confirmed at AAA (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to the rating on the Class A1 notes being confirmed at AAA (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to the rating on the Class A1 notes being confirmed at AAA (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to the rating on the Class A1 notes being confirmed at AAA (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to the rating on the Class A1 notes being confirmed at AAA (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to the rating on the Class A1 notes being confirmed at AAA (sf).

Class A2 Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade of the Class A2 notes to AA (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade of the Class A2 notes to A (high) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade of the Class A2 notes to AA (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade of the Class A2 notes to AA (low) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A2 notes to A (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A2 notes to A (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A2 notes to A (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A2 notes to BBB (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: Marcos Meier, Senior Analyst, Credit Ratings
Rating Committee Chair: Ketan Thaker, Head of European RMBS and Covered Bonds
Initial Rating Date: 12 September 2023

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The credit rating methodologies used in the analysis of this transaction 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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