Morningstar DBRS Confirms Credit Rating on Florence SPV S.r.l. (2020) Following Amendment

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AA (high) (sf) credit rating on the Class A Notes issued by Florence SPV S.r.l. (2020) (the Issuer) following a transaction amendment (the Amendment).

The credit rating addresses the timely payment of interest and the ultimate payment of principal by the final maturity date in October 2042.

CREDIT RATING RATIONALE
The confirmation is based on the following analytical considerations:
-- The Amendment to the transaction, consisting of an increase in the current limit on flexible loans in subsequent portfolios to 100.0% from 85.0%;
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the February 2024 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions for the remaining collateral pool, considering the updated quarterly vintage default data received in the context of the Amendment;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AA (high) (sf) credit rating level; and
-- No purchase termination events, breach of concentration limits, or trigger events to date.

The transaction is a revolving securitisation of unsecured personal loans granted by Findomestic Banca S.p.A. (Findomestic) to individuals residing in Italy. The transaction closed in October 2020 and was structured with a 24-month revolving period that was scheduled to end in October 2022, but was extended until October 2024 following a transaction amendment in July 2022. During the revolving period, Findomestic may sell new receivables to the Issuer subject to certain conditions, limitations, and purchase termination events. During this period, the Issuer will fund the purchase of new receivables either through principal collections or additional notes subscriptions. The transaction is structured with a principal deficiency ledger mechanism, whereby provisioning occurs when a loan is classified as defaulted. Findomestic services the collateral portfolio and Banca Finanziaria Internazionale S.p.A. acts as the backup servicer facilitator.

AMENDMENT
The following Amendment to the transaction took effect on 28 February 2024:
-- Increase in the concentration limit on flexible loans for subsequent portfolios to 100.0% from 85.0%.

PORTFOLIO PERFORMANCE
As of the January 2024 cut-off date, two- to three-month arrears represented 0.2% of the outstanding portfolio balance, slightly down from 0.3% in May 2023. As of the same cut-off date, the 90+-day delinquency ratio was 0.4%, stable since May 2023. As of January 2024, the gross cumulative default ratio was equal to 2.4% of the aggregate portfolio balance (initial plus subsequent portfolios), with insignificant recoveries realised to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS updated its base case PD and LGD to 7.2% and 85.4%, respectively, from 8.1% and 77.3%, respectively, based on updated historical default data from Findomestic and the transaction’s performance since closing. The portfolio assumptions continue to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio and the cash reserve provide credit enhancement to the Class A Notes. As of the February 2024 payment date, credit enhancement to the Class A Notes was 27.6%, stable since Morningstar DBRS’ initial credit rating, due to the transaction revolving period, which is expected to end in October 2024.

The transaction benefits from an amortising cash reserve, available to cover principal payments on the Class A Notes. The reserve is currently at its target level of EUR 96.0 million, or 1.6% of the collateral portfolio balance, and is floored at 0.8% of the initial portfolio balance.

The transaction also features an amortising liquidity reserve, available to cover senior fees and interest payments on the Class A Notes (only if principal collections are not sufficient to cover the interest deficiency). The reserve is currently at its target level of EUR 15.0 million, or 0.25% of the collateral portfolio balance, and is floored at 0.115% of the initial portfolio balance.

BNP Paribas Succursale Italia acts as the account bank for the transaction. Based on Morningstar DBRS’ private credit rating on the account bank, the downgrade provisions outlined in the transaction documents, and 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 rating assigned to the notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS’ credit rating the Class A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS’ credit rating does 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
There were no Environmental/Social/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 methodologies applicable to the credit rating are the “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 methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.

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.

Morningstar DBRS has conducted a review of the transaction’s legal documents provided in the context of the Amendment. A review of any other 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 this credit rating include payment and investor reports provided by Banca Finanziaria Internazionale S.p.A. as well as servicer reports, additional information, loan-level data, and the following historical performance data provided by Findomestic:
-- Static quarterly default data from Q4 2013 to Q4 2023 on the total origination book and on flexible loans separately.

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

At the time of the initial credit rating, 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 this credit rating 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 action on this transaction took place on 10 July 2023, when Morningstar DBRS confirmed its AA (high) (sf) credit rating on the Class A Notes.

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 rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (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 credit ratings.
-- The base case PD and LGD of the current pool of loans for the Issuer are 7.2% and 85.4%, 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.

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

This credit rating is 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 Credit Rating Date: 29 October 2020

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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
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://dbrs.morningstar.com/research/420573
-- Rating European Structured Finance Transactions Methodology (11 December 2022), https://dbrs.morningstar.com/research/425149
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

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].