Morningstar DBRS Confirms Credit Ratings on Giada Sec. S.r.l. and Giada Sec. S.r.l. (2022)

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the Class A Notes issued by each Giada Sec. S.r.l. (Giada) and Giada Sec. S.r.l. (2022) (Giada 2022; together with Giada, the Issuers) at A (high) (sf).

The credit ratings on both Class A Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date of each transaction.

CREDIT RATING RATIONALE
The confirmations are based on the following analytical considerations:
-- The portfolios' performances, in terms of delinquencies, defaults, and losses, as of the latest payment dates;
-- The one-year base case probability of default (PD) and default and recovery rates on the 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 purchase conditions have occurred to date.

The transactions are revolving cash flow securitisations collateralised by portfolios of unsecured loans and secured loans (only Giada 2022) granted to Italian small and medium-size enterprises, entrepreneurs, artisans, and producer families by Intesa Sanpaolo S.p.A. (ISP) and other regional banks fully owned by ISP. ISP also acts as the servicer of the portfolio. Giada closed in December 2020, and its revolving period is scheduled to end in March 2026. Giada 2022 closed in December 2022, and its revolving period is expected to end in January 2026. However, the revolving periods will terminate prematurely if certain performance-related triggers are breached (e.g., if gross cumulative defaults rise above 8.5% or if the cash reserve does not reach its target).

Around 80.2% and 82.0% of the current portfolio balance of Giada and Giada 2022, respectively, is assisted by the Fondo Centrale di Garanzia (FCG) guarantee, a state guarantee that covers up to 100% of the loan balance. The weighted-average coverage for the current portfolio is equal to 82.0% and 85.0%, respectively.

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 applicable classes 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.

PORTFOLIO PERFORMANCE
The two portfolios are currently performing within Morningstar DBRS' expectations. As of the latest cut-off dates, the 90+-day arrears and gross cumulative default ratios were as follows:
-- Giada: 0.9% and 1.7%, respectively.
-- Giada 2022: 1.2% and 1.8%, respectively.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS continues to base its analysis on a stressed portfolio composition, constructed considering the purchase conditions applicable during the revolving period.

In particular, Morningstar DBRS maintained annualised PDs of 2.1% and 4.4% for unsecured and mortgage-backed loans, respectively, for the portfolios assumed to be outstanding after the end of the revolving periods. In the case of Giada, Morningstar DBRS assumed an annualised PD of 1.8% and 2.3% for corporate and retail borrowers, respectively, with respect to the portfolio assumed to be reinvested during the revolving period. In the case of Giada 2022, Morningstar DBRS assumed an annualised PD of 3.2% for the replenished portfolio.

Furthermore, Morningstar DBRS calculated the following stressed lifetime default and recovery assumptions at the A (high) (sf) credit rating level:
-- Giada: 37.1% and 25.9%, respectively.
-- Giada 2022: 38.2% and 35.5% respectively.
The recovery rates continue to be determined by giving partial credit to the FCG guarantee.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the Class A Notes. As of the latest payment date, the Class A Notes had the following credit enhancement:
-- Giada: 33.3%, down from 33.8% at the last review.
-- Giada 2022: 31.4%, down from 32.2% at the last review.

The transactions benefit from amortising and unfloored cash reserves, available to cover senior fees and interest payments on the Class A Notes. As of the latest payment date, the cash reserves were at their targets of EUR 112.00 million for Giada and EUR 194.75 million for Giada 2022.

Both transactions are structured with an additional cash reserve, funded upon breach of certain triggers. The reserve would be funded via a subordinated loan upon a downgrade of ISP below BB (high), for a target amount equal to EUR 900 million, and would act as a partial mitigant to set off risk.

ISP acts as the account bank. Based on Morningstar DBRS' account bank reference rating on ISP of A (low), which is one notch below its Long Term Critical Obligations Rating of "A", the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction's structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Class A Notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Social (S) Factors
Morningstar DBRS considered the presence of loans backed by the FCG Guarantee to be a relevant social factor for Giada and a significant social factor for Giada 2022 (Social Impact of Product & Services) as outlined within "Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings". Morningstar DBRS assumed reduced loss severity for the loans that are backed by the FCG Guarantee.
This is credit positive for both transactions given the reduced loss expectations for guaranteed loans, but only affects the credit rating of Giada 2022 as the credit rating output is more sensitive to the effect of the FCG guarantee than in Giada.

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

Morningstar DBRS analysed the transaction structures in its proprietary 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" (18 September 2024), https://dbrs.morningstar.com/research/439574.

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 transactions 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 revolving period in the transactions, the analysis continues to consider potential portfolio migration based on replenishment criteria set forth in the transactions' legal documents.

A review of the transactions' 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 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 Banca Finanziaria Internazionale S.p.A. and KPMG Fides Servizi di Amministrazione S.p.A., servicer reports and additional performance information 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 17 November 2023, when Morningstar DBRS upgraded its credit ratings on the Class A Notes issued by Giada and Giada 2022 to A (high) (sf) from A (sf).

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):

-- Probability of Default Rates Used: base case PD of 2.2% for Giada and a base case PD of 3.0% for Giada 2022, a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: at the A (high) (sf) credit rating level, base case recovery rate of 25.9% for Giada and 35.5% for Giada 2022, a 10% and 20% decrease in the base case recovery rate.

For Giada, 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 downgrade on the Class A Notes to A (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would lead to a confirmation on the Class A Notes at A (high) (sf).

For Giada 2022, 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 downgrade on the Class A Notes to A (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would lead to a confirmation on the Class A Notes at 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
Initial Rating Dates:
-- Giada: 21 December 2020
-- Giada 2022: 6 December 2022

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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.

-- Rating CLOs Backed by Loans to European SMEs (18 September 2024) and SME Diversity Model v2.7.1.5., https://dbrs.morningstar.com/research/439574.
-- 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 Originators and Servicers (18 September 2024), https://dbrs.morningstar.com/research/439571.
-- Global Methodology for Rating CLOs and Corporate CDOs (19 September 2024),
https://dbrs.morningstar.com/research/439759.
-- European RMBS Insight Methodology (18 September 2024),
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.