DBRS Morningstar Confirms Credit Ratings on Brera SEC S.r.l. and Brera SEC2 S.r.l

DBRS Ratings GmbH (DBRS Morningstar) confirmed its A (high) (sf) credit ratings on the respective Class A notes (collectively, the rated notes) issued by Brera SEC S.r.l. (Brera 1) and Brera SEC2 S.r.l (Brera 2).

The credit ratings on the rated notes address the timely payment of interest and the ultimate repayment of principal on or before the respective legal final maturity dates in November 2071 (Brera 1) and December 2072 (Brera 2).

The confirmations follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the August 2023 and September 2023 payment dates for Brera 1 and Brera 2, respectively;
-- Portfolio default rate (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 assumed at the A (high) (sf) credit rating level.

The transactions are static securitisations of Italian first-lien residential mortgage loans originated, sold, and, serviced by Intesa Sanpaolo S.p.A. (ISP) and other subsidiaries of the group (Banco di Napoli S.p.A., Cassa di Risparmio in Bologna S.p.A., Cassa di Risparmio del Friuli Venezia Giulia S.p.A., and Cassa dei Risparmi di Forli' e della Romagna S.p.A.) now incorporated into ISP. The Brera 1 and Brera 2 transactions closed in December 2017 and November 2019, respectively, and both follow the standard structure under Italian securitisation law.

PORTFOLIO PERFORMANCE
-- Brera 1: As of the August 2023 payment date, loans that were one to two months and two to three months delinquent represented 0.04% and 0.1% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.1%. Gross cumulative defaults amounted to 0.8% of the original collateral balance, of which 85.1% has been recovered so far.
-- Brera 2: As of the September 2023 payment date, loans that were one to two months and two to three months delinquent represented 0.1% and 0.03% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.1% of the portfolio balance. Gross cumulative defaults amounted to 0.2% of the original collateral balance, of which 8.0% has been recovered so far.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD assumptions as follows:
-- For Brera 1, the base case PD and LGD assumptions were updated to 9.2% and 11.8%, respectively.
-- For Brera 2, the base case PD and LGD assumptions were updated to 5.9% and 11.5%, respectively.

CREDIT ENHANCEMENT
The subordination of the respective unrated Class B notes provides credit enhancement to the Class A notes in each transaction. Credit enhancement to the Class A notes in Brera 1 was 30.0% as of the August 2023 payment date, up from 26.6% one year ago, while credit enhancement to the Class A notes in Brera 2 was 18.8% as of the September 2023 payment date, up from 17.4% as of the September 2022 payment date.

Both transactions benefit from an amortising liquidity reserve, which is available to provide support to the rated notes throughout the life of the transaction by covering senior fees and shortfall in interest payments (and principal at the final maturity date or the redemption date). For Brera 1, the liquidity reserve is replenished up to 2.5% of the principal outstanding amount of the Class A notes at the previous calculation date. The reserve is currently at its target level of EUR 65.1 million and has been at its target since closing. For Brera 2, the liquidity reserve is replenished up to 2.0% of the principal outstanding amount of the Class A notes at the previous calculation date. The reserve is currently at its target level of EUR 86.0 million and has also been at its target since closing.

ISP acts as the account bank for both transactions. Based on the account bank reference rating of ISP at A (low) (one notch below the DBRS Morningstar Long-Term Critical Obligations Rating of “A”), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structures, 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, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

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

DBRS Morningstar’s credit ratings do not address nonpayment 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” (22 October 2023), https://www.dbrsmorningstar.com/research/422281/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 transactions in accordance with the principal methodology.

A review of the transactions 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/421590/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 Securitisation Services S.p.A., servicer reports 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 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 these transactions took place on 9 November 2022, when DBRS Morningstar confirmed its A (high) (sf) credit rating on the rated notes.

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 transactions 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.
-- For Brera 1, the base case PD and LGD assumptions for the remaining collateral pool are 9.2% and 11.8%, respectively.
-- For Brera 2, the base case PD and LGD assumptions for the remaining collateral pool are 5.9% and 11.5%, 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 of the Class A notes in Brera 1 would be expected to remain at A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the credit rating of 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 credit rating of the Class A notes would also be expected to remain at A (high) (sf).

Brera 1 Class A 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 (high) (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 A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of A (high) (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)

Brera 2 Class A 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 (high) (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 A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of A (high) (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)

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: Alfonso Candelas, Senior Vice President
Brera 1 Initial Credit Rating Date: 11 December 2017
Brera 2 Initial Credit Rating Date: 27 November 2019

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The credit rating methodologies used in the analysis of these transactions 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 (22 October 2023), https://www.dbrsmorningstar.com/research/422281/master-european-structured-finance-surveillance-methodology.
-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight Model v6.0.1.0,
https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (2 October 2023),
https://www.dbrsmorningstar.com/research/421317/european-rmbs-insight-italian-addendum.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-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].