Morningstar DBRS Upgrades Credit Rating on Valsabbina SME 3 SPV S.r.l.

DBRS Ratings GmbH (Morningstar DBRS) upgraded to AAA (sf) from AA (sf) its credit rating on the Class A Notes issued by Valsabbina SME 3 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 legal final maturity date in July 2060.

The credit rating upgrade follows an annual review of the transaction and is based on the following analytical considerations:

-- The portfolio performance, in terms of delinquencies, defaults, and losses, as of the April 2024 payment date;
-- The one-year base case probability of default (PD), and default and recovery rates based on the current pool of receivables; and
-- The current available credit enhancement to the Class A Notes to cover the expected losses at their AAA (sf) credit rating level.

The transaction is a cashflow securitisation collateralised by a portfolio of performing mortgage and non-mortgage loans to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. The loans were mainly granted by Banca Valsabbina S.C.p.A. (Banca Valsabbina), but also by Credito Veronese S.p.A., which was merged into Banca Valsabbina in 2012.

The transaction included a 24-month revolving period, which ended in July 2023, during which Banca Valsabbina sold new receivables (i.e., further portfolios) to the Issuer subject to certain conditions and limitations. Following the end of the revolving period, the Class A Notes started to amortise.

PORTFOLIO PERFORMANCE
As of the April 2024 payment date, loans two to three months in arrears represented 0.10% of the outstanding portfolio balance, up from 0.02% in April 2023. The 90+ delinquency ratio was 0.03%, down from 0.05% one year ago, and the cumulative default ratio remained at 0.00%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the current pool of receivables and maintained its base case PD of 6.5% and 2.7% for mortgage and nonmortgage loans, respectively.

CREDIT ENHANCEMENT
The Class A Notes benefit from credit enhancement provided by the subordination of the Class B Notes and the cash reserve. The credit enhancement has significantly increased to 44.7% from 30.3% since the notes started amortising following the end of the revolving period. The increased credit enhancement prompted the upgraded of the rating of the Class A Notes.

The transaction includes a cash reserve, which is available to cover senior fees and interest payments on the Class A Notes. The cash reserve started amortising after the end of the revolving period, subject to the target level being equal to 1.41% of the outstanding balance of the Class A Notes, up to a floor of 0.5% of the initial amount of the Class A Notes. As of the April 2024 payment date, the cash reserve was at its target level of EUR 7.9 million.

BNP Paribas Succursale Italia (BNP Paribas) acts as the transaction account bank. Based on Morningstar DBRS's private credit rating on BNP Paribas, the downgrade provisions outlined in the transaction documents, and other mitigating factors 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's "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS's 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's credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS's 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, GOVERNANCE CONSIDERATIONS
Social (S) Factors  
Morningstar DBRS considered that the presence of loans backed by the FCG Guarantee was a relevant 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 FCG Guarantee. This factor was significant last year as affected the rating; however, at the AAA (sf) credit rating level the reduced loss expectation for guaranteed loans is not affecting the rating and therefore is now a relevant factor.

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 cashflow engine.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is the "Rating CLOs Backed by Loans to European SMEs" (20 June 2024); https://dbrs.morningstar.com/research/434775.

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.

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 this credit rating include transaction reports provided by Banca Valsabbina and Securitisation Services S.p.A., 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 impact 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 17 July 2023 when Morningstar DBRS upgraded its credit rating to AA (sf) from A (high) (sf) on the Class A Notes.

The lead analyst responsibilities for this transaction have been transferred to Helvia Meana.

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):
-- PD rates used: One-year base case PD of 3.36%, a 10% and 20% increase on the base case PD.
-- Recovery rates used: Base case recovery rate of 24.2% at the AAA (sf) stress level, a 10% and 20% decrease in the base case recovery rates.

For the Class A Notes, Morningstar DBRS concluded that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf), and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A Notes at AAA (sf). A scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10%, ceteris paribus, would also lead to a downgrade of the Class A Notes to AA (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: Helvia Meana, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Associate Managing Director
Initial Rating Date: 29 July 2021

DBRS Ratings GmbH
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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://www.dbrsmorningstar.com/about/methodologies.

-- Rating CLOs Backed by Loans to European SMEs (20 June 2024) and SME Diversity Model 2.6.1.4, https://dbrs.morningstar.com/research/434775
-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024), https://dbrs.morningstar.com/research/428544
-- European RMBS Insight Methodology (25 March 2024),
https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: Italian Addendum (28 June 2024),
https://dbrs.morningstar.com/research/435263
-- Legal Criteria for European Structured Finance Transactions (28 June 2024),
https://dbrs.morningstar.com/research/435165
-- Master European Structured Finance Surveillance Methodology (7 March 2024),
https://dbrs.morningstar.com/research/429051
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030
-- Interest Rate Stresses for European Structured Finance Transactions (28 June 2024),
https://dbrs.morningstar.com/research/435278

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].