Morningstar DBRS Upgrades Credit Ratings on Three Italian Salary Assignment Transactions

DBRS Ratings GmbH (Morningstar DBRS) upgraded its credit ratings on six classes of notes issued in the context of three Italian salary assignment transactions as follows:

Eridano II SPV S.r.l. (E2):
-- Class A Asset-Backed Floating-Rate Notes to AA (sf) from AA (low) (sf)
-- Class B Asset-Backed Floating-Rate Notes to AA (sf) from A (high) (sf)

Progetto Quinto S.r.l. (PQ):
-- Class A Notes to AA (sf) from AA (low) (sf)

Pelmo S.r.l. (Pelmo):
-- Class A Notes to AA (sf) from AA (low) (sf)
-- Class B Notes to AA (low) (sf) from A (sf)
-- Class C Notes to A (high) (sf) from A (low) (sf)

Additionally, Morningstar DBRS removed the Under Review with Positive Implications (UR-Pos.) status on the rated notes of each Issuer. These credit ratings were placed UR-Pos. following the release of an updated Rating European Consumer and Commercial ABS methodology which introduced a revision of the application of stresses to salary-assignment loans. For more information, please see: https://dbrs.morningstar.com/research/426219.

The credit ratings on all Class A Notes address the timely payment of interest and the ultimate payment of principal by the respective final maturity dates. The credit ratings on all other classes of notes address the ultimate payment of interest and the ultimate payment of principal by the respective final maturity dates while the relevant bond is subordinated, but the timely payment of interest when the bond becomes the most-senior tranche, in accordance with the Issuer’s default definition in the transaction documents.

CREDIT RATING RATIONALE
The credit rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performances, in terms of delinquencies, defaults, and losses, as of the respective latest payment dates;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective rating levels; and
-- The updated “Rating European Consumer and Commercial Asset-Backed Securitisations” methodology.

PORTFOLIO PERFORMANCE
The three portfolios are currently performing within Morningstar DBRS’ initial expectations.

As of the latest cut-off dates, the 90+-day arrears and gross cumulative default ratios were as follows:
-- E2: 0.6% and 1.8%, respectively
-- PQ: 0.5% and 5.1%, respectively
-- Pelmo: 0.8% and 3.6%, respectively

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pools of receivables and updated its base case PD and LGD assumptions as follows:
-- E2: 8.7% and 6.3%, respectively
-- PQ: 8.1% and 8.8%, respectively
-- Pelmo: 8.7% and 9.1%, respectively

The changes in Morningstar DBRS’ PD and LGD assumptions compared with the previous annual reviews were driven by the updated “Rating European Consumer and Commercial Asset-Backed Securitisations” methodology, portfolio deleveraging and changes in the pools composition.

CREDIT ENHANCEMENT
Credit enhancement to the rated notes is provided by overcollateralisation of the outstanding portfolio balance.

As of the latest payment dates, credit enhancement levels were as follows compared with the latest annual review in January 2023:
-- E2 – Class A Asset-Backed Floating-Rate Notes: 34.5%, up from 20.2%
-- E2 – Class B Asset-Backed Floating-Rate Notes: 13.5%, up from 8.0%
-- PQ – Class A Notes: 30.1%, up from 19.2%
-- Pelmo – Class A Notes: 18.7%, slightly up from 16.2%
-- Pelmo – Class B Notes: 11.1%, slightly up from 8.3%
-- Pelmo – Class C Notes: 8.2%, slightly up from 5.4%

All transactions benefit from cash reserves, available to cover senior fees and expenses, swap or cap payments (if any), and interest payments on the Class A, Class B (if any), and Class C Notes (if any). Various performance-related triggers are in place to defer the interest on subordinated notes upon portfolio deterioration. Cash trapping conditions are also in place to trap the excess spread upon the breach of certain triggers.

With respect to Pelmo, performance thresholds are established to trigger the irreversible sequential amortisation of the rated notes (currently repaying on a pro rata basis), with the Class A Notes paid in priority to the Class B Notes and the Class B Notes paid in priority to the Class C Notes.

E2 also benefits from a prepayment reserve, available to cover losses arising from the set-off of capitalised fees.

All reserves were at their target levels as of the latest payment dates.

BNP Paribas, Succursale Italia acts as the account bank for E2 and PQ while BNY Mellon SA/NV, Milan Branch acts as the account bank for Pelmo. Based on Morningstar DBRS’ private/public ratings on the account banks, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in each transaction’s structure, Morningstar DBRS considers the risk arising from the exposure to the account banks to be consistent with the ratings assigned to the notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Société Générale, S.A. acts as the swap counterparty for E2 while BNP Paribas SA acts as the swap counterparty for PQ and the cap counterparty for Pelmo. Morningstar DBRS’ public ratings on the swap/cap counterparties are consistent with the first and second rating thresholds, as defined in Morningstar DBRS’ “Derivative Criteria for European Structured Finance Transactions” methodology. The swap/cap documents are compliant with the same methodology.

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

Morningstar DBRS’ credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transactions documents that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
Social (S) and Governance (G) Factors
The high exposure to public-sector employees, pensioners, and civil servants makes these transactions dependent on the creditworthiness of the Italian sovereign. Morningstar DBRS considers some of the key drivers behind the latest rating action on Italy – namely Human Capital and Human Rights (S) and Institutional Strength, Governance & Transparency (G) – to be significant rating factors. According to the IMF Word Economic Outlook, Italy’s GDP per capita of USD 34,085 in 2022 was relatively low compared with its euro area peers. According to the World Bank, Italy ranked for Governance Effectiveness at 67th percentile in 2022. Morningstar DBRS took these factors into account in the “Economic Structure and Performance”, “Fiscal Management and Policy”, and “Political Environment” building blocks of its “Global Methodology for Rating Sovereign Governments”.

Credit rating actions on the Republic of Italy are likely to have an impact on these credit ratings. ESG factors that have a significant or relevant effect on the credit analysis of the Republic of Italy are discussed separately at https://dbrs.morningstar.com/research/422494/dbrs-morningstar-confirms-republic-of-italy-at-bbb-high-stable-trend.

There were no Environmental factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Morningstar DBRS analysed the transactions’ structures in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to these credit ratings are: “Master European Structured Finance Surveillance Methodology” (11 December 2023), https://dbrs.morningstar.com/research/425148, and the “Rating European Consumer and Commercial Asset-Backed Securitisations” (8 January 2024), https://dbrs.morningstar.com/research/426219.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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

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 sources of data and information used for these credit ratings include:
-- For E2, servicer reports provided by ViViBanca S.p.A. and investor reports provided by Banca Finanziaria Internazionale S.p.A.
-- For PQ, servicer reports provided by Banca Progetto S.p.A. and investor reports provided by Banca Finanziaria Internazionale S.p.A.
-- For Pelmo, servicer reports provided by Sigla S.r.l. and investor reports provided by Banca Finanziaria Internazionale S.p.A.
-- For all transactions, loan-level data provided by the European DataWarehouse GmbH.

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

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

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

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

The last credit rating actions on these transactions took place on 24 January 2024 when Morningstar DBRS placed all the ratings on the rated notes UR-Pos. Prior to that, on 27 January 2023, when Morningstar DBRS confirmed its ratings as follows:
-- For E2, Class A and Class B Asset-Backed Floating-Rate Notes at AA (low) (sf) and A (high) (sf), respectively.
-- For PQ, Class A Notes at AA (low) (sf).
-- For Pelmo, Class A, Class B, and Class C Notes at AA (low) (sf), A (sf), and A (low) (sf), respectively.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):

Morningstar DBRS expected a lifetime base case PD and LGD for the pools 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.

-- E2: 8.7% and 6.3%, respectively
-- PQ: 8.1% and 8.8%, respectively
-- Pelmo: 8.7% and 9.1%, 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 assumptions.

E2:
Class A Asset-Backed Floating-Rate 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 AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (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 (low) (sf)

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

PQ:
Class A 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 AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (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)

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

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

For further information on Morningstar DBRS 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 Morningstar DBRS 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: Pascale Kallas, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates:
-- E2: 5 October 2020
-- PQ: 16 April 2021
-- Pelmo: 15 June 2021

DBRS Ratings GmbH
Neue Mainzer Straße 75
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://dbrs.morningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (11 December 2023), https://dbrs.morningstar.com/research/425148/master-european-structured-finance-surveillance-methodology
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219/rating-european-consumer-and-commercial-asset-backed-securitisations
-- Rating European Structured Finance Transactions Methodology (11 December 2023), https://dbrs.morningstar.com/research/425149/rating-european-structured-finance-transactions-methodology
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].