Morningstar DBRS Confirms Credit Rating on Veicolo di Sistema S.r.l. With Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit rating on the Class A Notes issued by Veicolo di Sistema S.r.l. (the Issuer) at BBB (low) (sf) with a Stable trend.

The transaction represents the issuance of Class A, Class B, and Class J Notes (collectively, the Notes). The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before its final maturity date. Morningstar DBRS does not rate the Class B Notes and the Class J Notes.

As of the relevant cut-off dates, the Class A Notes were backed by a EUR 611.4 million portfolio by gross book value (GBV) of unsecured and secured nonperforming loans (NPLs) granted to San Marino and Italian borrowers and sold to the Issuer by Banca di San Marino S.p.A. (BSM), Cassa di Risparmio della Repubblica di San Marino S.p.A. (CRSM), Banca Agricola Commerciale S.p.A. (BAC), Società di Gestione degli Attivi ex BNS S.p.A. (SGA), 739 SG S.p.A. (739), and Veicolo Pubblico Di Segregazione Fondi Pensione S.p.A. (VPSF; together with BSM, CRSM, BAC, SGA, and 739, the Sellers).

The securitised portfolio, based on Morningstar DBRS' assessment of the final dataset provided on 8 December 2023, is composed of (1) unsecured exposures, representing approximately 53.5% of the GBV; (2) secured loans, representing 33.5% of the GBV, approximately 82.9% by GBV of which benefits from a first-ranking mortgage; and (3) leases backed by real estate (RE) assets, representing the remaining 13.0% of the GBV. At the relevant cut-off dates, the portfolio mainly comprised corporate borrowers with 76.5% of GBV and the properties securing the exposures in the portfolio mainly comprised residential assets at 33.9% by updated RE value. The secured collateral was mainly concentrated in the Republic of San Marino at 51.5% by updated RE value while Emilia Romagna was the most represented Italian region at 16.7% by updated RE value.

Sammarinese S.r.l. (S3 or the Special Servicer) services the receivables while Istituto per la Gestione e il Recupero dei Crediti S.p.A. (IGRC) acts as the master servicer for the transaction. Guber Banca S.p.A. and Banca Finanziaria Internazionale S.p.A. (Banca Finint) act, respectively, as special servicer adviser and master servicer adviser. No back-up servicer has been appointed.

The Issuer benefits from a guarantee from the Republic of San Marino for the prompt and complete payment of all current and future liabilities of the Issuer with respect to obligations arising under the Class A Notes pursuant to article 21 of the San Marino Securitisation Law and any relevant applicable regulations (the RSM Guarantee).

In accordance with Law no. 157 of 31 August 2021 (the RSM Securitisation Law), the transaction benefits from a pledge governed by the law of the Republic of San Marino granted to the Issuer by each of the Sellers for an amount equal to EUR 13.76 million at issuance, which represents 20% of the cash proceeds upon the sale of the Class A Notes (the Pledged Amount). The Pledged Amount constitutes a cash reserve held in escrow with the Central Bank of San Marino (SM Account Bank); the amount standing thereon will be released and used in case of a Class A Notes Shortfall Event, which is a shortfall in the funds available to pay amounts due as principal and interest on the Class A Notes, and the senior costs of the transaction in certain circumstances. The target amount of the cash reserve established by the Pledged Amount on each interest payment date (IPD) is sized at 8.0% of the principal outstanding on the Class A Notes.

In case the Pledged Amount is not sufficient to pay the Issuer's liabilities with respect to the payments of principal and interest due under the Class A Notes, the Issuer is allowed to enforce the RSM Guarantee. The RSM Guarantee was approved by the Republic of San Marino State Congress on 28 November 2023 and is unconditional, irrevocable, and on first demand and for an amount not exceeding EUR 70.0 million, plus any due and unpaid interest amount above this cap. The Issuer will be required to pay an annual premium equal to 85 basis points calculated on the outstanding principal of the Class A Notes less the Pledged Amount.

CREDIT RATING RATIONALE
The credit rating confirmation follows a review of the transaction and is based on the following analytical considerations:
-- The financial guarantee covering the rated liabilities (i.e., Class A Notes) in accordance with Appendix 2 - Obligations Backed by Insurance Policy (Financial Guarantee) to the "Rating European Structured Finance Transactions Methodology". Morningstar DBRS' credit rating on the guarantor, the Republic of San Marino, is BBB (low) (Long-Term Foreign and Local Currency Rating - Issuer Rating) with a Stable trend as of the date of this press release.
-- Transaction performance: An assessment of portfolio recoveries as of May 2024, focusing on (1) a comparison between actual collections and the Special Servicer's initial business plan forecast, (2) the collection performance observed over recent months, and (3) a comparison between the current performance and Morningstar DBRS' expectations.
-- Portfolio characteristics: The loan pool composition as of August 2024 and the evolution of its core features since issuance.
-- Transaction liquidating structure: The order of priority entails a fully sequential amortisation of the Notes (i.e., the Class B Notes will begin to amortise following the full repayment of the Class A Notes and the Class J Notes will begin to amortise following the repayment of the Class B Notes).
-- Liquidity support: The transaction benefits from an amortising cash reserve providing liquidity to the structure and covering potential interest shortfall on the Class A Notes. The cash reserve target amount is equal to 3.7% of the Class A Notes' principal outstanding and is currently fully funded. The transaction also benefits from the Pledged Amount which constitutes an additional cash reserve available to pay principal and interest on the Class A Notes. The target amount of the cash reserve established by the Pledged Amount on each IPD is sized at 8.0% of the principal outstanding on the Class A Notes.
-- Morningstar DBRS determined that the structure of the transaction is linked to the credit risk of the Republic of San Marino. However, Morningstar DBRS recognises that there could be scenarios where, even upon the Republic of San Marino's default, (1) the cash flow generated by the assets included in the portfolio would be sufficient to meet the timely payment of interest and the ultimate repayment of principal due under the Class A Notes and (2) the Central Bank of San Marino would continue to honour its payment obligations as SM Account Bank (as required by the RSM Securitisation Law), allowing the Issuer to meet its obligations under the Class A Notes. Nevertheless, Morningstar DBRS is of the opinion that the likelihood of such scenarios is insufficient to warrant a credit rating on the Class A Notes that is higher than BBB (low), which is the current credit rating on the Republic of San Marino.

TRANSACTION AND PERFORMANCE
According to the latest investor report from June 2024, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 44.5 million, EUR 42.2 million, and EUR 50.3 million, respectively. As of the June 2024 payment date, the balance of the Class A Notes had amortised by 36.4% since issuance and the aggregated transaction balance was EUR 137.1 million.

As of May 2024, the transaction was performing above the special servicer's business plan expectations. The actual cumulative gross collections from the cut-off date equalled EUR 26.4 million whereas the servicer's initial business plan estimated cumulative gross collections of EUR 24.5 million for the same period. Therefore, as of May 2024, the transaction was overperforming by EUR 1.9 million (+7.6%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 15.7 million (including EUR 7.7 million in proceeds collected until November 2023) in the BBB (low) (sf) stressed scenario. Therefore, as of May 2024, the transaction was performing above Morningstar DBRS' initial stressed expectations.

The initial business plan assumes total cumulative gross collections from the cut-off date of EUR 135.7 million. Excluding actual collections, the Special Servicer's expected future collections from June 2024 are EUR 111.2 million.

The final maturity date of the transaction is in December 2036.

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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

The impact of any credit rating actions on the Republic of San Marino on this credit rating are assessed in accordance with the "Rating European Structured Finance Transactions Methodology, Appendix 2 - Obligations Backed by Insurance Policy (Financial Guarantee)" ESG factors that have a significant or relevant effect on the credit analysis of the Republic of San Marino are discussed separately at https://dbrs.morningstar.com/issuers/29482.

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 Intex Dealmaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: "Master European Structured Finance Surveillance Methodology" (19 November 2024), https://dbrs.morningstar.com/research/443204.

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.

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 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 the Issuer, S3, IGRC, and Banca Finint which comprise, in addition to the information received at issuance, the investor report as of June 2024; and the quarterly and monthly servicer reports as of September 2024 and October 2024, respectively.

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 14 December 2023, when Morningstar DBRS finalised its provisional credit rating on the Class A Notes.

The lead analyst responsibilities for this transaction have been transferred to Pablo Iturriaga.

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 concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a confirmation of the Class A notes at BBB (low) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class A notes at BBB (low) (sf).

Please note that the credit rating on the Class A Notes remains at BBB (low) (sf) in the sensitivity analysis due to the presence of the RSM Guarantee and the counterparty risk arising from the Central Bank of San Marino acting as SM Account Bank for the transaction.

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: Pablo Iturriaga, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 11 December 2023

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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 European Structured Finance Transactions Methodology, Appendix 2 - Obligations Backed by Insurance Policy (Financial Guarantee) (19 November 2024),
https://dbrs.morningstar.com/research/443199
-- Rating European Nonperforming and Reperforming Loans Securitisations (19 November 2024), https://dbrs.morningstar.com/research/443201
-- Master European Structured Finance Surveillance Methodology (19 November 2024), https://dbrs.morningstar.com/research/443204
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024), https://dbrs.morningstar.com/research/443196
-- Rating European Consumer and Commercial Asset-Backed Securitisations (18 September 2024), https://dbrs.morningstar.com/research/439583
-- European RMBS Insight Methodology (3 December 2024),
https://dbrs.morningstar.com/research/444100
-- European CMBS Rating and Surveillance Methodology (17 January 2024),
https://dbrs.morningstar.com/research/426818
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024), https://dbrs.morningstar.com/research/439571
-- 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.