Morningstar DBRS Confirms Credit Ratings on Centro delle Alpi SME S.r.l.

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the notes issued by Centro delle Alpi SME S.r.l. (CdA SME or the Issuer) as follows:

-- the Class A1, Class A2, Class A3 and Class A4 Notes (together the Class A Notes) at A (sf); and
-- the Class M Notes (together with the Class A Notes, the rated notes) at BB (high) (sf).

The credit ratings on the Class A Notes address the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in July 2060, while the credit rating on the Class M Notes addresses the ultimate payment of interest and the ultimate repayment of principal by the legal final maturity date.

CREDIT RATING RATIONALE
The credit rating 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 May 2024 payment date;
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables;
-- The credit enhancement currently available to the rated notes to cover the expected losses at their respective credit rating levels; and
-- No purchase termination events, or breach of concentration limits have occurred to date.

CdA SME is a revolving cash flow securitisation collateralised by a portfolio of mortgage and unsecured loans to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. The loans were granted by Banca Popolare di Sondrio S.p.A. (PopSo), that also services the portfolio.

The transaction is structured with a 24-month ramp-up period, scheduled to end in June 2025 (included), during which PopSo may sell new receivables to the Issuer subject to certain eligibility criteria and concentration limits. Additionally, the ramp-up period will terminate early if certain performance and non-performance based trigger events occur. During the ramp-up period, the purchase of new receivables will be funded through portfolio collections and/or via further instalment payments under the notes. The subscription of further notes will be subject to the maintenance of minimum subordination levels, as per the transaction documents. To date, the Issuer purchased only one subsequent portfolio.

The purchase conditions require that the amount of loans benefitting from the Fondo Centrale di Garanzia (FCG) during the ramp-up period be at least 55.0% of the aggregate unsecured portfolio and that the weighted average guarantee coverage be at least 70.0%. Morningstar DBRS adjusted the recovery rates to account for the benefit of the guarantee.

PORTFOLIO PERFORMANCE
As of the 30 April 2024 portfolio cut-off date, delinquencies were low, with 90+-day arrears representing 0.4% of the outstanding portfolio balance. The gross cumulative default ratio stood at 0.1% of the initial and subsequent portfolio balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS maintained its base case one-year PDs for secured and unsecured loans at 3.4% and 2.1%, respectively.

Morningstar DBRS continued to base its analysis on a worst-case portfolio created in line with the purchase conditions and the common and specific criteria applicable during the ramp-up period. Morningstar DBRS updated its lifetime default and recovery assumptions as follows:
-- at the A (sf) rating level to 32.8% and 40.2%, respectively;
-- at the BB (high) (sf) rating level to 20.4% and 49.6%, respectively.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio and the cash reserve provide credit enhancement to the notes. As of the May 2024 payment date, credit enhancement to the Class A and the Class M Notes was 27.5% and 18.3%, respectively, up from 26.8% and 17.6%, respectively, at closing. The transaction is structured in a way such that minimum credit enhancement levels must be maintained during the ramp-up period, if further instalment payments under the notes are made.

The transaction benefits from an amortising cash reserve available that can cover shortfalls in expenses, senior fees, and interest payments on the Class A Notes and, prior to the occurrence of a Class M Notes Interest Subordination Event, on the Class M Notes. The target cash reserve is equal to the greater of 2.0% of the principal outstanding balance of the Class A Notes and 1.44% of the performing outstanding portfolio, with a floor of EUR 5.6 million. As of the May 2024 payment date, the cash reserve was at its target of EUR 39.2 million.

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 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 rating assigned to the Class A 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 document(s) that are not financial obligations.

Morningstar DBRS' long-term credit rating provides 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 presence of loans backed by the FCG Guarantee to be a significant social factor (Social Impact of Product & Services) as outlined within "Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings". This is credit positive as Morningstar DBRS assumed reduced loss severity for the loans that are backed by the FCG Guarantee.

There were no Environmental/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 its proprietary Excel-based cash flow engine.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable to the credit ratings is "Rating CLOs Backed by Loans to European SMEs" (23 February 2024), https://dbrs.morningstar.com/research/428543.

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 surveillance section of the principal methodology.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a ramp-up 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 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 investor reports provided by Banca Finanziaria Internazionale S.p.A., servicer reports provided by PopSo 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 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.

This is the first credit rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Pascale Kallas.

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):
-- Probability of Default Rates Used: Base case PDs of 3.4% and 2.1%, for mortgage and non-mortgage loans, respectively, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rates of 39.7% and 49.6% at the A (sf) and BB (high) (sf) credit rating levels, respectively, a 10% and 20% decrease in the base case recovery rate.

Morningstar DBRS concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A Notes at A (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would also lead to a confirmation of the Class A Notes at A (sf).

Morningstar DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Class M Notes at BB (high) (sf), and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade of the Class M Notes to BB (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would also lead to a downgrade of the Class M Notes to BB (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 Date: June 16, 2023

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 (7 March 2023), https://dbrs.morningstar.com/research/429051
-- Rating CLOs Backed by Loans to European SMEs (23 February 2024) and SME Diversity Model v2.6.1.4., https://dbrs.morningstar.com/research/428543
-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024), https://dbrs.morningstar.com/research/428544
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- European RMBS Insight Methodology (25 March 2024), https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: Italian Addendum (2 October 2023), https://dbrs.morningstar.com/research/421317
-- 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

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].