Morningstar DBRS Confirms Credit Ratings on Lanterna Mortgage S.r.l.

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AAA (sf) credit ratings on the Class A1 and Class A2 notes (the rated notes) issued by Lanterna Mortgage S.r.l. (the Issuer).

The credit ratings on the Class A1 and Class A2 notes address the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date.

The confirmations 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 January 2024 payment date;
-- 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 at the AAA (sf) rating level.

The portfolio consists of Italian residential mortgage loans originated by Banca Carige S.p.A. and Banca del Monte di Lucca S.p.A., both of which were acquired by BPER Banca S.p.A. (BPER Banca). BPER Banca is also the servicer of the portfolio. Zenith Service S.p.A. has been appointed as the backup servicer.

Most of the pool (79.9% as of the September 2023 cut-off date) is assisted by a state guarantee, subsidised through a specific fund (Fondo Prima Casa) and aimed at facilitating the purchase of first properties by households. This first-demand guarantee, released through the state agency Consap S.p.A. (Consap), covers 50% of the outstanding loan balance (at default).

The Class A1 notes rank in priority to the Class A2 notes with respect to both interest and principal payments. Interest on the Class A2 notes ranks in priority to the principal on the Class A1 notes. In a post-enforcement scenario, the Class A1 and Class A2 notes will rank pari passu and pro rata with respect to both interest and principal payments.

PORTFOLIO PERFORMANCE
As of January 2024, loans one to three months delinquent were 0.9% of the outstanding portfolio balance, up from 0.4% in January 2023; the 90+-day delinquency ratio was 1.4%, up from 0.5% at same time last year; and the cumulative default ratio was 1.1%, up from 1.0% at the time of the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD assumptions to 18.7% and 13.1%, respectively. The PD and LGD at the AAA (sf) stress scenarios were 48.8% and 32.0%, respectively.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the rated notes. As of the January 2024 payment date, credit enhancement to the Class A1 and Class A2 notes was 53.2% and 46.5%, respectively, up from 46.5% and 40.5% at the previous annual review, respectively.

The transaction also features a cash reserve available to cover expenses, senior fees, and interest on both the Class A1 and Class A2 notes. The target cash reserve is equal to 2.5% of the outstanding principal balance of the rated notes (without any floor) and will start amortising from the July 2030 payment date. As of the January 2024 payment date, the cash reserve was at its target level of EUR 4,626,750.

The Bank of New York Mellon SA/NV, Milan Branch (BNYM Milan) acts as the account bank for the transaction. Based on Morningstar DBRS’ Long-Term Senior Debt credit rating of AA (high) on the account bank, the downgrade provisions outlined in the transaction documents, and the structural mitigants inherent in the transaction structure, Morningstar DBRS 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 Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" 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 transaction 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) Factors
Morningstar DBRS considered the loans backed by the Consap guarantee to be a relevant rating factor (Social Impact of Product & Services) as outlined in the “Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” framework. Morningstar DBRS assumed reduced loss severities for the loans backed by the Consap guarantee as outlined in its “European RMBS Insight: Italian Addendum” methodology. While this is credit positive, it did not affect the credit rating on the rated notes.

There were no Environmental or Governance 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 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 (11 December 2023), https://dbrs.morningstar.com/research/425148.

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 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include transaction reports provided by BNYM Milan; servicer reports and other additional information provided by BPER Banca; and 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 impact the rating analysis.

Morningstar DBRS considers the data and information available to it for the purpose 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 rating process.

The last credit rating action on this transaction took place on 17 February 2023, when Morningstar DBRS confirmed its AAA (sf) credit ratings on the Class A1 and Class A2 notes.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available at 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 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 the credit ratings.
-- The base case PD and LGD of the current pool of loans for the Issuer are 18.7% and 13.1%, 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 assumption. For example, if the LGD increases by 50%, the credit rating on the Class A1 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 A1 notes would be expected to fall to A (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the credit rating on the Class A1 notes would be expected to fall to A (sf).

Class A1 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 A (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 A (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of A (sf)

Class A2 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 A (low) (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 A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of A (low) (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: Baran Cetin, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 31 July 2020

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
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight Model v 6.0.2.0,
https://dbrs.morningstar.com/research/411634
-- European RMBS Insight: Italian Addendum (2 October 2023),
https://dbrs.morningstar.com/research/421317

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].