DBRS Morningstar Confirms Ratings on Two Popolare Bari RMBS Transactions

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the notes issued by 2017 Popolare Bari RMBS S.r.l. (2017 Popolare Bari) and 2018 Popolare Bari RMBS S.r.l. (2018 Popolare Bari) as follows:

2017 Popolare Bari:

-- Class A Notes at AA (high) (sf)
-- Class B Notes at AA (low) (sf)

2018 Popolare Bari:

-- Class A Notes at AA (high) (sf)
-- Class B Notes at AA (low) (sf)

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the respective legal final maturity dates. The rating on the Class B Notes addresses the ultimate payment of interest and principal on or before the respective legal final maturity dates (April 2058 for 2017 Popolare Bari and April 2059 for 2018 Popolare Bari).

The confirmations follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the April 2020 payment date for both transactions.
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels.

2017 Popolare Bari and 2018 Popolare Bari are securitisations of Italian first-lien residential mortgage loans originated and serviced by Banca Popolare di Bari S.c.p.A. (BPB) and Cassa di Risparmio di Orvieto S.p.A. (CRO). The transactions closed in July 2017 and June 2018, respectively, when both special purpose vehicles issued one class of floating-rate senior notes (Class A Notes), one class of floating-rate mezzanine notes (Class B Notes), and two classes of floating-rate and additional return junior notes (Class J1 and Class J2 Notes).

BPB services the portfolio, with Zenith Service S.p.A. appointed as the backup servicer. The Bank of Italy placed BPB under special administration on 13 December 2019, which would constitute a servicer termination event according to the transaction documents.

As of the date of this press release, no notice had been served to the transaction parties, namely the representative of the noteholders and the backup servicer. Nevertheless, the servicer continues to service the portfolio with no disruption observed so far. DBRS Morningstar believes that the transaction benefits from features that are considered to adequately mitigate risks arising from a potential servicing disruption, but continues to closely monitor the situation.

PORTFOLIO PERFORMANCE

Both portfolios are performing within DBRS Morningstar’s initial expectations.

For 2017 Popolare Bari, as of the March 2020 cut-off date, there were no loans in the two- to three-month arrears bucket, while the 90+ delinquency ratio was 1.8%, up from 0.9% as of the March 2019 cut-off date. The cumulative gross default ratio stood at 1.0% of the initial portfolio balance, up from 0.2% last year.

For 2018 Popolare Bari, as of the March 2020 cut-off date, similar to 2017 Popolare Bari there were no loans in the two- to three-month arrears bucket, while the 90+ delinquency ratio was 1.0%, up from 0.3% as of the March 2019 cut-off date. The cumulative gross default ratio stood at 0.2% of the initial portfolio balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS

DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD assumptions as follows:

-- 2017 Popolare Bari: 7.3% and 6.7%, respectively
-- 2018 Popolare Bari: 6.6% and 7.0%, respectively

CREDIT ENHANCEMENT

For both transactions, overcollateralisation of the outstanding collateral portfolio provides credit enhancement and does not include the cash reserve.

For 2017 Popolare Bari, as of the April 2020 payment date, credit enhancement to the Class A and Class B Notes was 33.2% and 21.3%, respectively, up from 27.2% and 17.0%, respectively, as of the April 2019 payment date.

For 2018 Popolare Bari, as of the April 2020 payment date, credit enhancement to the Class A and Class B Notes was 24.2% and 16.4%, respectively, up from 18.9% and 12.1%, respectively, as of the April 2019 payment date.

Both transactions benefit from an amortising cash reserve, which provides liquidity support and is available to cover senior fees, amounts due to the swap counterparty, and interest payments on the Class A Notes.

As of the April 2020 payment date, both reserves are at their target levels of EUR 12.3 million for 2017 Popolare Bari and of EUR 16.2 million for 2018 Popolare Bari. The target level is equal to 3.0% of the rated notes’ outstanding balance, with a floor equal to 1.0% of the rated notes’ initial balance.

BNP Paribas Securities Services, Milan branch acts as the account bank for both transactions. Based on the private ratings of the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

For 2017 Popolare Bari, two swap transactions are in place, one to cover fixed-floating interest rate risk and the other to hedge basis risk on floating-rate loans with cap.

For 2018 Popolare Bari, three swap transactions are in place, the first to cover fixed-floating interest rate risk, the second to hedge basis risk on floating-rate loans with cap, and the third to hedge basis risk on floating-rate loans without cap.

J.P. Morgan AG acts as the swap counterparty for both transactions. DBRS Morningstar has given no credit to the swap transactions, as the swap documentation is not consistent with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology, given the rating assigned to the notes.

DBRS Morningstar analysed the transaction structures in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many RMBS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were updated on 1 June 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/361867/global-macroeconomic-scenarios-june-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information on DBRS Morningstar considerations for European RMBS transactions and Coronavirus Disease (COVID-19), please see the following commentary:
https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:

All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions 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 for each transaction.

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.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.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include servicer reports provided by BPB, payment and investor reports provided by Securitisation Services S.p.A., and loan-by-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 ratings, for both transactions, 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 purposes of providing these ratings 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 actions on 2017 Popolare Bari took place on 29 July 2019, when DBRS Morningstar confirmed the ratings on the Class A and Class B Notes at AA (high) (sf) and AA (low) (sf), respectively.

The last rating actions on 2018 Popolare Bari took place on 14 June 2019, when DBRS Morningstar upgraded its ratings on the Class A and Class B Notes to AA (high) (sf) and AA (low) (sf), from AA (sf) and A (high) (sf), respectively.

The lead analyst responsibilities for both transactions have been transferred to Daniele Canestrari.

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

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (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.

-- For 2017 Popolare Bari, the base case PD and LGD of the current pool of loans for the Issuer are 7.3% and 6.7%, respectively.
-- For 2018 Popolare Bari, the base case PD and LGD of the current pool of loans for the Issuer are 6.6% and 7.0%, 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. Taking the Class A Notes of 2017 Popolare Bari as an example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at AA (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to fall to A (high) (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 fall to A (high) (sf).

2017 Popolare Bari

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

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

2018 Popolare Bari

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

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (sf)

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

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

Lead Analyst: Daniele Canestrari, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President

2017 Popolare Bari - Initial Rating Date: 31 July 2017
2018 Popolare Bari - Initial Rating Date: 14 June 2018

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 rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (22 April 2020)
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020)
https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (10 December 2019) and European RMBS Credit Model v 1.0.0.0
https://www.dbrsmorningstar.com/research/354403/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Interest Rate Stresses for Structured Finance Transactions (10 October 2019)
https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019)
https://www.dbrsmorningstar.com/research/350907/derivative-criteria-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.dbrsmorningstar.com/research/278375.

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