Morningstar DBRS Confirms Credit Rating on Emilia SPV S.r.l.

DBRS Ratings GmbH (Morningstar DBRS) confirmed its A (high) (sf) credit rating on the Class A Notes issued by Emilia SPV S.r.l. (the Issuer).

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in February 2064.

CREDIT RATING RATIONALE
The confirmation is based on the following analytical considerations:
-- Portfolio performance in terms of delinquencies, defaults, and losses, as of the February 2024 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the A (high) (sf) credit rating level; and
-- No purchase termination events or breach of transfer limits have occurred to date.

The transaction is a revolving securitisation of first-lien residential mortgage loans granted by Credito Emiliano S.p.A. (CREDEM) to individuals and families resident in Italy. CREDEM services the portfolio and also covers the role of the account bank while Banca Finanziaria Internazionale S.p.A. acts as the backup servicer facilitator. The transaction initially closed in April 2015 when the Class A and Class B Notes were issued for nominal amounts of EUR 3 billion and EUR 900 million, respectively.

The structure provides for partially paid notes that can be subscribed up to their nominal amounts to finance the purchase of subsequent portfolios. The notes can amortise during the replenishment period if certain conditions are met. Since the issue date, 10 subsequent portfolios were sold to the Issuer, nine of which were financed with further notes subscriptions. The Class A Notes subordination during the replenishment period is based on a dynamic credit enhancement mechanism, depending on the credit quality of the pool in terms of loan-to-value (LTV) and portfolio yield. In general, the credit enhancement to the Class A Notes can vary during the replenishment period as the Issuer purchases further portfolios, but can never decrease below the contractual floor of 18.5%.

The revolving period was extended for five years when the transaction was amended in March 2021, and it is currently scheduled to end on the May 2026 payment date. At the same time, several changes were made to the transfer limits. For more information please refer to https://www.dbrsmorningstar.com/issuers/20785.

PORTFOLIO PERFORMANCE
The portfolio is performing within Morningstar DBRS' expectations. As of the 31 December 2023 portfolio cut-off date, delinquencies were low, with 90+ days arrears representing 0.01% of the portfolio performing balance, slightly down from 0.03% as of 31 December 2022, while no defaults were recorded so far. As of the same cut-off date, the current LTV was 55.4%, slightly down from 56.2% at the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the pool of receivables and, given the presence of a revolving period, continues to derive its base case PD and LGD assumptions based on a worst-case portfolio composition as per the replenishment criteria set forth in the transaction legal documents.

Given the revolving nature of the transaction and its dynamic credit enhancement features, Morningstar DBRS continued to consider four portfolios based on the weighted-average LTV, but slightly updated its base case PD assumptions and maintained its base case LGD assumptions as follows:
-- 10.3% and 19.5%, respectively, for the worst-case portfolio with 75% LTV.
-- 10.5% and 21.8%, respectively, for the worst-case portfolio with 80% LTV.
-- 10.7% and 24.0%, respectively, for the worst-case portfolio with 85% LTV.
-- 11.0% and 26.0%, respectively, for the worst-case portfolio with 90% LTV.

To capture certain adverse characteristics that the pool might develop during the replenishment period, Morningstar DBRS increases the risk segment of each loan to a higher segment than otherwise would have been calculated for each loan.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the Class A Notes. Credit enhancement will dynamically change based on the credit quality of the pool in terms of LTV and portfolio yield, but will never decrease below the contractual floor of 18.5%. As of the February 2024 payment date, the Class A Notes credit enhancement was at the floor of 18.5%.

The transaction benefits from a cash reserve, which provides liquidity support and is available to cover senior fees and interest payments on the Class A Notes. The reserve is amortising and, as of the February 2024 payment date, it was at its target of EUR 88.2 million.

CREDEM acts as the account bank for the transaction. Based on Morningstar DBRS' private rating on CREDEM, 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 rating assigned to the Class A Notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS' credit rating on 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 document(s) 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 DBRS Morningstar 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 rating is the Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051.

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.

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 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 Morningstar DBRS 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 investor reports provided by Banca Finanziaria Internazionale S.p.A., servicer reports provided by CREDEM, 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 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 21 April 2023, when Morningstar DBRS upgraded its credit rating on the Class A Notes to A (high) (sf) from A (sf), following a transaction amendment.

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):

-- The base case PD and LGD of the current pool of loans for the Issuer are 10.3% and 19.5%, respectively, for the constructed portfolio with 75% LTV; 10.5% and 21.8%, respectively, for the constructed portfolio with 80% LTV; 10.7% and 24.0%, respectively, for the constructed portfolio with 85% LTV; and 11.0% and 26.0%, respectively, for the constructed portfolio with 90% LTV.

-- 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.
-- 25% increase in LGD, expected 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 (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 Rating Date: 22 April 2015

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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 (7 March 2024), https://dbrs.morningstar.com/research/429051

-- 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 (7 March 2024), https://dbrs.morningstar.com/research/429054.

-- 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

-- European RMBS Insight Methodology (25 March 2024) and European RMBS Insight Model v.6.0.2.1, https://dbrs.morningstar.com/research/430103

-- 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].