Morningstar DBRS Confirms Credit Ratings on Brera SEC2 S.r.l and Brera SEC3 S.r.l

DBRS Ratings GmbH (Morningstar DBRS) confirmed its A (high) (sf) credit ratings on the respective Class A notes (collectively, the rated notes) issued by Brera SEC2 S.r.l (Brera 2) and Brera SEC3 S.r.l (Brera 3).

The credit ratings on the rated notes address the timely payment of interest and the ultimate repayment of principal on or before the respective legal final maturity dates in December 2072 (Brera 2) and May 2072 (Brera 3).

CREDIT RATING RATIONALE
The confirmations follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the September 2024 and August 2024 payment dates for Brera 2 and Brera 3, respectively;
-- 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 assumed at the A (high) (sf) credit rating level.

Both transactions are securitisations of Italian first-lien residential mortgage loans originated, sold and serviced by Intesa Sanpaolo S.p.A. (ISP), and follow the standard structure under Italian securitisation law.

PORTFOLIO PERFORMANCE
-- Brera 2: As of the September 2024 payment date, loans that were one to two months and two to three months delinquent represented 0.06% and 0.01% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.11% of the portfolio balance. Gross cumulative defaults amounted to 0.23% of the original collateral balance, of which 17.37% has been recovered so far.
-- Brera 3: As of the August 2024 payment date, loans that were one to two months and two to three months delinquent represented 0.02% and 0.00% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.06%. Gross cumulative defaults amounted to 0.04% of the original collateral balance, of which 15.52% has been recovered so far.

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 as follows:
-- Brera 2: 4.1% and 11.2%, respectively.
-- Brera 3: 4.9% and 13.2%, respectively.

CREDIT ENHANCEMENT
The subordination of the respective unrated Class B notes and the liquidity reserve provide credit enhancement to the Class A notes in each transaction. Credit enhancement to the Class A notes in Brera 2 was 20.3% as of the September 2024 payment date, up from 18.8% at the time of the last annual review, while credit enhancement to the Class A notes in Brera 3 was 11.9% as of the August 2024 payment date, up from 11.5% as of the November 2023 payment date.

Both transactions benefit from an amortising liquidity reserve, which is available to provide support to the rated notes throughout the life of the transaction by covering senior fees and shortfalls in interest payments (and principal at the final maturity date or the redemption date). For Brera 2, the liquidity reserve is replenished up to 2.0% of the principal outstanding amount of the Class A notes at the previous calculation date. The reserve is currently at its target level of EUR 77.3 million and has been at its target since closing. For Brera 3, the liquidity reserve is replenished up to 1.0% of the principal outstanding amount of the Class A notes at the previous calculation date. The reserve is currently at its target level of EUR 59.5 million and has been at its target since closing.

ISP acts as the account bank for both transactions. Based on the account bank reference rating of A (low) on ISP (one notch below its Morningstar DBRS Long Term COR of "A"), the downgrade provisions outlined in the transactions documents, and structural mitigants inherent in the transactions structures, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit ratings assigned to the Class A Notes, as described in Morningstar DBRS` "Legal Criteria for European Structured Finance Transactions" methodology.

ISP covers all key roles, including, but not limited to, the servicer, account bank, and paying agent. Morningstar DBRS considers the counterparty risk to be consistent with the ratings assigned to the Class A Notes, in accordance with the "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. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781.

Morningstar DBRS analysed the transactions structures 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 (6 August 2024) https://dbrs.morningstar.com/research/437540.

Other methodologies referenced in these transactions are listed at the end of this press release.

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

A review of the transactions legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating actions.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to "Appendix C: The Impact of Sovereign Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for these credit ratings include investor reports provided by Securitisation Services S.p.A., servicer reports provided by ISP, 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 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.

The last credit rating action on these transactions took place on 9 November 2023 (Brera 2) and 1 December 2023 (Brera 3), when Morningstar DBRS confirmed its A (high) (sf) credit ratings on the respective Class A notes.

The lead analyst responsibilities for these transactions have been transferred to Pascale Kallas.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://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 pools 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.
-- For Brera 2, the base case PD and LGD assumptions for the remaining collateral pool are 4.1% and 11.2%, respectively.
-- For Brera 3, the base case PD and LGD assumptions for the remaining collateral pool are 4.9% and 13.2%, 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

Brera 2 Class A Risk Sensitivity:
-- 25% increase in LGD, expected credit 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 (high) (sf)

Brera 3 Class A Risk Sensitivity:
-- 25% increase in LGD, expected credit 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 (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.

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, Associate Managing Director
Brera 2 Initial Rating Date: 27 November 2019
Brera 3 Initial Rating Date: 1 December 2021

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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.

-- Legal Criteria for European Structured Finance Transactions (28 June 2024),
https://dbrs.morningstar.com/research/435165.
-- Master European Structured Finance Surveillance Methodology (6 August 2024), 
https://dbrs.morningstar.com/research/437540.
-- Operational Risk Assessment for European Structured Finance Originator and Servicers (18 September 2024), https://dbrs.morningstar.com/research/439571.
-- European RMBS Insight Methodology (18 September 2024) and European RMBS Insight Model v10.0.0.0, https://dbrs.morningstar.com/research/439573.
-- European RMBS Insight: Italian Addendum (30 September 2024), 
https://dbrs.morningstar.com/research/440245
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024), 
https://dbrs.morningstar.com/research/439913.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781.

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/439604.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.