DBRS Morningstar Upgrades Rating of Sardegna Re-Finance S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) upgraded its rating of the Class A notes issued by Sardegna Re-Finance S.r.l. (the Issuer) to AA (sf) from AA (low) (sf).

The rating addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in December 2060.

The upgrade follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults and losses as of the September 2019 payment date.
-- Updated probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining collateral portfolio.
-- Current credit enhancement available to the Class A notes to cover the expected losses at the AA (sf) rating level.

The Issuer is a securitisation of first-lien residential mortgages originated and serviced by Banco di Sardegna S.p.A. (BdS), which is part of the BPER Group, and BPER S.p.A. is the majority shareholder of BdS. Sardegna Re-Finance S.r.l. issued two classes of floating-rate notes, namely the Class A notes and Class J notes, in December 2017. The transaction follows the standard structure under the Italian securitisation law. The transaction’s ramp-up period, during which the Issuer could acquire further portfolios, ended in December 2018.

On 13 November 2019, DBRS Morningstar transferred the ongoing coverage of the rating assigned to the Issuer to DBRS Ratings GmbH from DBRS Ratings Limited. The lead analyst responsibilities for this transaction have been transferred to Petter Wettestad.

Both DBRS Ratings Limited and DBRS Ratings GmbH are registered with the European Securities and Markets Authority (ESMA) under Regulation (EC) No. 1060/2009 on Credit Rating Agencies, as amended, and are registered Nationally Recognized Statistical Rating Organization (NRSRO) affiliates in the United States and Designated Rating Organization (DRO) affiliates in Canada.

PORTFOLIO PERFORMANCE
As of the September 2019 payment date, loans one- to two-months and two- to three-months delinquent represented 0.3% and 0.6% of the portfolio balance, respectively, while loans more than three-months delinquent represented 0.2%. Gross cumulative defaults amounted to 0.4% of the aggregate original balance, of which 3.4% have been recovered so far.

PORTFOLIO ASSUMPTIONS
DBRS Morningstar conducted a loan-by-loan analysis on the current pool and updated its base case PD and LGD assumptions to 6.9% and 8.2% from 18.3% and 19.3%, respectively. The decrease in the assumptions are due to the conclusion of the ramp-up period and no longer consider a worst-case portfolio composition.

CREDIT ENHANCEMENT
The Class J notes provides credit enhancement. As of the September 2019 payment date, credit enhancement to the Class A notes was 25.1%, up from 23.8%, one year ago.

The transaction benefits from an amortising cash reserve account, which is available to cover senior expenses and missed interest payments on the Class A notes. This account was initially funded with EUR 22.5 million, and its target amount will be the higher of 1.5% of the outstanding performing portfolio balance and 1.75% of the outstanding principal of the Class A notes. The cash reserve is currently funded at EUR 26.4 million and has been at its target since closing.

BNP Paribas Securities Services SCA/Milan acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of BNP Paribas Securities Services SCA/Milan, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Class A notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “Master European Structured Finance Surveillance Methodology”.

DBRS Morningstar 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 rating action.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include investor reports provided by Banco di Sardegna S.p.A., and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purpose of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 6 December 2018, when DBRS Morningstar confirmed the rating of the Class A notes at AA (low) (sf).

The lead analyst responsibilities for this transaction have been transferred to Petter Wettestad.

Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies is available at www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool 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.
-- The base case PD and LGD of the current pool of loans for the Issuer are 6.9% and 8.2%, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes would be expected to remain at AA (sf).

Class A Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and US regulations only.

Lead Analyst: Petter Wettestad, Financial Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 21 December 2017

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

Ratings issued and monitored by DBRS Ratings GmbH are noted as such on the DBRS website; however, the language
and related statements in previously published press releases in respect of the relevant ratings will not be changed
retroactively and will remain as part of DBRS’s historical record. The ratings issued and monitored in the European
Union are marked as such in their respective rating tables. As part of this transfer, these markings will remain
unchanged on all active ratings related to the Issuer.

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Interest Rate Stresses for European Structured Finance Transactions

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.