Morningstar DBRS Assigns Credit Rating to Valsabbina SME 4 SPV S.r.l.

DBRS Ratings GmbH (Morningstar DBRS) assigned a credit rating of A (sf) to the EUR 802,300,000 Class A Asset Backed Partly Paid Notes due January 2062 (the Class A Notes) issued by Valsabbina SME 4 SPV S.r.l. (the Issuer).

The credit rating addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date in January 2062. The Issuer also issued the Class J Notes (together with the Class A Notes, the Notes), which Morningstar DBRS does not rate.

The transaction is a cash flow securitisation collateralised by a portfolio of performing mortgage and nonmortgage loans to Italian small and medium-size enterprises (SMEs), including professionals and corporates. The loans were granted by Banca Valsabbina S.C.p.A. (Banca Valsabbina or the originator), which also services the portfolio.

The reference portfolio will be transferred in two stages. With a cut-off date of 31 October 2024, the originator transferred the first initial portfolio consisting of 2,122 loans with a total outstanding balance of EUR 474.80 million. The second initial portfolio will be transferred on the second payment date (28 April 2025) and will consist of additional loans with a maximum total outstanding balance of EUR 611.10 million.

Similarly, the Issuer issued the nominal amount of the notes on the issue date (28 November 2024) on a partly paid basis (the initial instalment), to fund the acquisition of the first initial portfolio, the cash reserve, and the initial expenses. On the second payment date (the incremental instalment date), the proceeds from the incremental instalment on the Notes, together with the available funds, will fund the purchase of the second initial portfolio and the respective increase of the cash reserve. The proceeds from the initial instalment on the Notes totalling EUR 481.46 million correspond to the EUR 351.48 million paid on the Class A Notes and EUR 129.98 million paid on the Class J Notes.

The transaction includes a 2.5-year revolving period, scheduled to end in April 2027 (inclusive), during which time the originator may sell new receivables (i.e., further portfolios) to the Issuer subject to certain conditions and limitations. On the first payment date only, specific conditions and limitations apply. During the revolving period, the purchase of new receivables will be funded through principal collections and excess spread to make up for any defaulted loans. The revolving period will end prematurely if certain events occur, including the cumulative gross default rate exceeding 3.5%, the inability to fully replenish the cash reserve, and the insolvency of the originator. In addition, the nontransfer of the second initial portfolio will cause the end of the revolving period, and the amortisation of the Notes will start from the second payment date. Morningstar DBRS also tested this scenario in its analysis.

The transaction includes a cash reserve, which is available to cover senior fees and interest on the Class A Notes. The cash reserve will start amortising from the first payment date 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 nominal amount of the Class A Notes.

The deal is structured with a single waterfall and an implicit principal deficiency ledger mechanism whereby provisioning occurs when a loan is classified as defaulted (i.e., classified as "sofferenza" or in arrears by 180 days or more). However, if the revolving period terminates prematurely, the implicit undercollateralisation exceeds 5.0%, or the cumulative gross default ratio exceeds 4.0%, the transaction will start trapping all excess spread to amortise the Class A Notes.

The Class A Notes benefit from a total credit enhancement of 27.0%, and it is provided by the overcollateralisation of the portfolio and the cash reserve.

As of 31 October 2024, the first initial portfolio consisted of 2,122 loans extended to 1,902 borrower groups with a principal outstanding balance of EUR 474.80 million. As of the same date, the total initial portfolio (which is composed of the first initial portfolio and the provisional second initial portfolio) consisted of 9,029 loans extended to 6,626 borrower groups, with an aggregate par balance of EUR 1.08 billion, of which EUR 5.21 million is in arrears by less than 30 days. The second initial portfolio is not fully identified, as the actual number of loans and outstanding portfolio balance will include also newly originated loans from 31 October 2024 to the cut-off date of the second initial portfolio, which comply with the common and specific eligibility criteria.

Morningstar DBRS based its analysis on a stressed portfolio created in line with the purchase conditions, the common criteria, and further portfolio-specific criteria applicable from the second payment date.

The total initial portfolio consists of senior unsecured loans representing 78.5% of the outstanding portfolio balance and mortgage-backed loans representing the remaining 21.5%. Historical performance data indicates that mortgage-backed loans have a higher historical probability of default (PD) than the unsecured loans. This behaviour is in line with other SME loan originators. The purchase conditions applicable from the second payment date limit the portion of mortgage-backed loans in the portfolio to 22.0%. Morningstar DBRS' analysis was based on the maximum portion of mortgage loans in the portfolio, as it carries the highest loss expectations because of the higher associated PD.

The total initial portfolio exhibits a high geographic concentration in the Italian region of Lombardy, which accounts for 66.0% of the portfolio outstanding balance. This geographic concentration reflects the bank's significant presence in this region. The portfolio is further concentrated in the regions of Veneto and Emilia-Romagna, accounting for 16.3% and 8.0%, respectively.

The total initial portfolio exhibits a moderate sector concentration. The top three sector exposures, according to Morningstar DBRS' industry classifications are consumer packaged goods, real estate, and homebuilding & construction, which represent 18.5%, 15.1%, and 11.9% of the outstanding portfolio balance, respectively. For the worst-case portfolio analysis, Morningstar DBRS assumed the top three industries to be 21.2%, 17.7%, and 16.6%, respectively, in line with the replenishment conditions. The initial portfolio has a moderate borrower concentration, as the largest and top five- and 10-largest borrowers only account for 0.8%, 3.2%, and 5.7% of the outstanding portfolio balance, respectively. The purchase conditions applicable from the second payment date limit the exposure to the largest borrower to 1.0% and the top 20 borrowers to 10.0% of the portfolio; these limits were considered in creating the Morningstar DBRS worst-case portfolio.

TRANSACTION COUNTERPARTIES
Banca Valsabbina acts as the servicer, and Banca Finanziaria Internazionale S.p.A. (Banca Finint) acts as the backup servicer facilitator for this transaction. The backup servicer facilitator supports the Issuer in appointing a substitute servicer in case the servicer's appointment is terminated. Banca Finint also acts as representative of the noteholders, computation agent and corporate servicer in the context of the transaction.

The Bank of New York Mellon SA/NV, Milan Branch (BNY) is the account bank and paying agent for the transaction. Morningstar DBRS has a public rating on BNY, which meets Morningstar DBRS' criteria to act in such capacities. The transaction documents contain downgrade provisions consistent with Morningstar DBRS' criteria with respect to BNY's role as account bank.

Morningstar DBRS determined its credit rating based on the principal methodology and the following analytical considerations:
-- The PD for the portfolio, determined using the historical performance information supplied. Morningstar DBRS assumed an annualised PD of 4.9% and 2.5% for mortgage and nonmortgage loans, respectively.
--The assumed weighted-average life (WAL) of the portfolio was 3.1 years.
-- The PDs and WAL used in the Morningstar DBRS Diversity Model to generate the hurdle rate for the assigned credit rating.
-- The recovery rate, determined by considering the market value declines for Europe, the security level, and the collateral type. Morningstar DBRS used recovery rates of 36.2% and 21.3% for the secured and unsecured loans, respectively, at the A (sf) credit rating level. Morningstar DBRS determined the final recovery rate by giving partial credit to the Fondo Centrale di Garanzia guarantee. Morningstar DBRS used a weighted-average recovery rate of 39.9% at the A (sf) credit rating level.
-- The break-even rates for the interest rate stresses and default timings, determined using Morningstar DBRS' cash flow tool.

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. The associated financial obligations are the related interest payment amounts and the related principal amount outstanding.

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
General Considerations 
The total initial portfolio includes 72.2% of loans backed by the Fondo Centrale di Garanzia (FCG) guarantee. During the revolving period, the purchase conditions applicable from the second payment date limit the minimum amount of nonmortgage portfolio assisted by the FCG guarantee to 80.0%. The presence of loans benefitting from FCG guarantee in the portfolio, whose ultimate guarantor is the Republic of Italy, makes the transaction dependent on the Italian sovereign.

Environmental (E) Factors
There was no Environmental factor that had a significant or relevant effect on the credit analysis.

Social (S) Factors
Morningstar DBRS considered that the presence of loans backed by the FCG guarantee was a social factor (Social Impact of Product & Services) as outlined within the Morningstar DBRS Criteria -- "Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings". Morningstar DBRS assumed reduced loss severity for the loans which are backed by FCG guarantee. This is credit positive and impacts the credit rating, given the reduced loss expectations for guaranteed loans.

In addition, Morningstar DBRS considers some of the key drivers behind the latest rating action on the Republic of Italy, namely Human Capital and Human Rights, as significant rating factors for the rating action.

Governance (G) Factors
Morningstar DBRS considers some of the key drivers behind the latest rating action on the Republic of Italy, namely Institutional Strength, Governance and Transparency, as significant rating factors for the rating action. At the same time, Morningstar DBRS views the Bribery, Corruption, and Political Risks factor as relevant.

Credit rating actions on the Republic of Italy are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the Republic of Italy are discussed separately at https://dbrs.morningstar.com/issuers/17689.
 
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 (13 August 2024) at https://dbrs.morningstar.com/research/437781.

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 rating is Rating CLOs Backed by Loans to European SMEs (19 November 2024) https://dbrs.morningstar.com/research/443198.

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 considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 this credit rating include performance data relating to the receivables provided by the originator, directly or through the arranger, Banca Finanziaria Internazionale S.p.A.

Morningstar DBRS received the following data information, split by mortgage and nonmortgage loans:
-- Quarterly static default data from Q1 2014 to Q2 2024,
-- Quarterly static recovery data from Q1 2014 to Q2 2024,
-- Quarterly dynamic delinquency data from Q1 2010 to Q1 2024,
-- Quarterly dynamic prepayment data from Q1 2010 to Q2 2024.

Morningstar DBRS also received data information on the Fondo Centrale di Garanzia guarantee enforcement from 2015 to 2024.

In addition, Morningstar DBRS received loan-level characteristics, contractual amortisation profile and set-off exposure as at 31 October 2024.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

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.

This credit rating concerns a newly issued financial instrument. This is the first Morningstar DBRS credit rating on this financial instrument.

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 4.9% and 2.5% for mortgage and nonmortgage loans, respectively, a 10% and 20% increase on the base-case PD.
-- Recovery Rates Used: Base-case recovery rate of 39.9% at the A (sf) stress level, 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 each lead to a downgrade of the transaction to A (low) (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 downgrade of the Class A Notes to BBB (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: Ilaria Maschietto, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 28 November 2024

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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 (19 November 2024) and Morningstar DBRS SME Diversity Model 2.7.1.5, https://dbrs.morningstar.com/research/443198.
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024), https://dbrs.morningstar.com/research/443196.
-- 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.
-- Global Methodology for Rating CLOs and Corporate CDOs (19 November 2024), https://dbrs.morningstar.com/research/443207.
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024), https://dbrs.morningstar.com/research/439571.
-- 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.