DBRS Morningstar Upgrades Credit Rating on Clara Sec. S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) upgraded its credit rating on the Class A Notes issued by Clara Sec. S.r.l. (the Issuer) to AA (low) (sf) from A (high) (sf).

The credit rating addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date in October 2044.

Additionally, DBRS Morningstar removed the Under Review with Positive Implications (UR-Pos.) status on the Class A Notes. This credit rating was placed UR-Pos. following the release of an updated sovereign methodology. For more information, please see: https://www.dbrsmorningstar.com/research/421863.

The upgrade is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the October 2023 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AA (low) (sf) credit rating level;
-- The updated sovereign methodology; and
-- No purchase termination events, breach of concentration limits, or trigger events to date.

The transaction is a revolving securitisation of unsecured consumer loans granted by Intesa Sanpaolo SpA (ISP) to individuals residing in Italy. The transaction closed in June 2020 and was structured with a revolving period that is scheduled to end in January 2026. During this period, ISP may sell new receivables to the Issuer subject to certain conditions, limitations, and purchase termination events. During the amortisation period, the notes will be repaid according to a formula redemption amount; however, if a pass-through condition materialises (i.e., the cumulative default ratio exceeds 10%), excess spread will also be used to pay down principal on the notes.

ISP covers all key roles, including, but not limited to, the servicer, account bank, and paying agent. DBRS Morningstar considers the counterparty risk to be consistent with the credit rating assigned to the Class A Notes, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

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 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.

PORTFOLIO PERFORMANCE
The portfolio is performing within DBRS Morningstar’s expectations. As of the August 2023 cut-off date, loans two to three months in arrears represented 0.1% of the outstanding portfolio balance while loans more than three months in arrears represented 0.5%. The gross cumulative default ratio was equal to 0.7% of the initial portfolio balance (including additional portfolios).

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar maintained its base case PD and LGD assumptions at 3.0% and 85.0%, respectively.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio and the cash credited on the investment account during the revolving period provide credit enhancement. As of the October 2023 payment date, credit enhancement available to the Class A Notes was 10.5%, down from 11.5% at the closing date. DBRS Morningstar considered the potential for a further decrease in credit enhancement in its analysis.

The transaction benefits from an amortising cash reserve, available to cover shortfalls on senior fees, expenses, and interest payments on the Class A Notes. The reserve is currently at its target level of EUR 127.0 million, which is equal to 2.0% of the Class A Notes’ outstanding balance.

An additional cash reserve will also be funded if DBRS Morningstar’s Long Term Critical Obligations Rating (COR) on ISP falls below a certain threshold. The target will be EUR 60.0 million multiplied by the ratio between the current and the initial portfolio balance.

ISP acts as the account bank for the transaction. Based on the account bank reference rating of A (low) on ISP (one notch below its DBRS Morningstar Long Term COR of “A”), 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 credit rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant impact 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 rating are 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 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’s 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.

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.

The sources of data and information used for this credit rating include investor reports provided by Banca Finanziaria Internazionale S.p.A.; loan-level data provided by the European DataWarehouse GmbH; as well as servicer reports and additional information from ISP.

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

At the time of the initial credit rating, 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 this credit rating 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 October 2023 when DBRS Morningstar placed the credit rating Under Review with Positive Implications following release of an updated sovereign methodology.

Prior to that, on 24 January 2023 DBRS Morningstar upgraded its credit rating on the Class A Notes to A (high) (sf) from A (sf), following a transaction amendment.

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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit 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 3.0% and 85.0%, 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 AA (low) (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 remain at AA (low) (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 remain at AA (low) (sf).

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

This credit 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: 23 June 2020

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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.

-- Master European Structured Finance Surveillance Methodology (22 October 2023), https://www.dbrsmorningstar.com/research/422281/master-european-structured-finance-surveillance-methodology.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (22 October 2023), https://www.dbrsmorningstar.com/research/422276/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (6 October 2023), https://www.dbrsmorningstar.com/research/421599/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- 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.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://www.dbrsmorningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators.
-- 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].