Morningstar DBRS Upgrades Credit Ratings on Colt SPV S.r.l.

DBRS Ratings GmbH (Morningstar DBRS) upgraded its credit ratings on the notes issued by Colt SPV S.r.l. (Colt, or the Issuer) as follows:

-- Class A and A-2 Notes to AAA (sf) from AA (sf)
-- Class B and B-2 Notes to BBB (high) (sf) from B (high) (sf)

The credit ratings on the Class A and Class A-2 Notes (together, the Senior Notes) address the timely payment of interest and the ultimate repayment of principal by the final maturity date. The credit ratings on the Class B and Class B-2 Notes (together, the Mezzanine Notes and, together with the Senior Notes, the rated notes) address the ultimate payment of interest and the ultimate repayment of principal by the final maturity date, in accordance with the Issuer's default definition provided in the transaction documents (i.e., the timely payment of interest when they become the most senior tranche).

CREDIT RATING RATIONALE
The upgrades are based on the following analytical considerations:
-- The portfolio's performance, in terms of delinquencies, defaults, and losses, as of the November 2024 payment date;
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables; and
-- Current available credit enhancement to the rates notes to cover the expected losses at their respective credit rating levels.

Colt is a static cash flow securitisation collateralised by a portfolio of nonmortgage floating-rate loans granted to Italian corporates and small and medium-sized enterprises (SMEs) by illimity Bank S.p.A. (illimity). The loans included in the portfolio are either unsecured (22.2% of the performing portfolio balance), or benefit from a guarantee issued by SACE S.p.A. (SACE; 60.4% of the performing portfolio balance), or by Fondo Centrale di Garanzia (FCG; 17.4% of the performing portfolio balance). The weighted-average coverage for the current portfolio is equal to 85.9%. The asset portfolio is serviced by illimity, with Banca Finanziaria Internazionale S.p.A. (Banca Finint) acting as the backup servicer.

PORTFOLIO PERFORMANCE
The portfolio is currently performing within Morningstar DBRS' expectations. As of the October 2024 cut-off date, 1.0% of the portfolio was in the 30-60 arrears bucket and 8.7% classified as unlikely-to-pay. There are no defaults since closing.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS was not provided with historical performance data, because of the relatively short origination history of the bank. The originator provided the borrowers' private ratings assigned by an ESMA-registered credit rating agency that specialises in Italian nonfinancial companies. Morningstar DBRS assessed the portfolio's credit quality using its internal mapping of such ratings. Morningstar DBRS applied additional adjustments to reflect the expectations of a higher PD associated to borrowers with past adverse credit history that underwent a turnaround process. The recovery rates continue to be determined by giving partial credit to the SACE and FCG guarantee.

Morningstar DBRS calculated the following lifetime default and recovery assumptions:
-- at the AAA (sf) credit rating level: 45.5% and 18.5%, respectively; and
-- at the BBB (high) (sf) credit rating level: 31.7% and 52.7%, respectively.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the rated notes, the cash reserve also provides credit enhancement to the Senior Notes. As of the November 2024 payment date, the credit enhancements, compared to December 2023, were as follows:
-- the Senior Notes: 61.7%, up from 34.6%; and
-- the Mezzanine Notes: 31.9%, up from 14.9%.

The increase in the credit enhancement available to the rated notes is a key driver of the credit rating upgrades.

The transaction benefits from a cash reserve, currently equal to EUR 8.3 million, available to cover senior expenses and interest payments on the Senior Notes. Released amounts will be available to pay down the Senior Notes. The cash reserve target is 4.0% of the Senior Notes' outstanding principal balance, with a floor of 1.0% of the Senior Notes' initial principal balance as of the relevant issue date.

The transaction also benefits from a set-off reserve, currently at EUR 8.4 million, available to partially mitigate the set-off risk. The set-off reserve will amortise as the set-off risk reduces or upon full redemption of the rated notes.

The transaction features a combined waterfall with a fully sequential amortisation mechanism, which allows excess spread to be used to pay down principal on the rated notes. Interest on the Mezzanine Notes is paid senior to the Senior Notes principal, unless a cumulative gross default trigger is breached.

The Bank of New York Mellon SA/NV - Milan Branch acts as the account bank for the transaction. Based on the Morningstar DBRS' AA (high) long-term public rating of 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 ratings assigned, as described in Morningstar DBRS' "Legal and Derivative 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 transaction's press releas 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
Social (S) Factors
Morningstar DBRS considered the presence of loans backed by the SACE and FCG guarantees to be a significant social factor (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 guarantees. This is credit positive given the reduced loss expectations for guaranteed loans.

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 structure 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" (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 surveillance section of the principal methodology.

A review of the transaction's 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 payment reports provided by Banca Finint, servicer reports and additional performance information provided by illimity, 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.

The last credit rating action on this transaction took place on 14 December 2023, when Morningstar DBRS upgraded its credit rating on the Class A Notes to AA (sf) from A (sf), assigned a AA (sf) credit rating to the Class A-2 Notes, confirmed its B (high) (sf) credit rating on the Class B Notes and assigned a B (high) (sf) credit rating to the Class B-2 Notes.

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 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):

-- PD Rates Used: Base case PD of 11.1%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 18.5% and 52.7% at the AAA (sf) and BBB (high) (sf) stress level, respectively, a 10% and 20% decrease in the base case recovery rate. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

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 on the Senior Notes at AAA (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 Senior Notes at AAA (sf).

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 of the Mezzanine Notes to BB (high) (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 Mezzanine Notes to BBB (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: 19 December 2022

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.

-- Rating CLOs Backed by Loans to European SMEs (19 November 2024) and SME Diversity Model v2.7.1.5, https://dbrs.morningstar.com/research/443198
-- Legal Criteria for European Structured Finance Transactions (19 November 2024), https://dbrs.morningstar.com/research/443196
-- Master European Structured Finance Surveillance Methodology (19 November 2024), https://dbrs.morningstar.com/research/443204
-- 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 November 2024), https://dbrs.morningstar.com/research/443207
-- European RMBS Insight Methodology (3 December 2024), https://dbrs.morningstar.com/research/444100
-- 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.