DBRS Morningstar Assigns A (sf) Rating to Giada Sec. S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned an A (sf) rating to the EUR 6,610,000,000 Class A Asset Backed Floating Rate Notes due December 2052 (the Class A Notes) issued by Giada Sec. S.r.l. (the Issuer or Giada).

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in December 2052. The Issuer also issued EUR 3,485,100,000 Class B Asset Backed Fixed Rate and Additional Return Notes due December 2052 (together with the Class A Notes, the Notes), which were not rated by DBRS Morningstar.

Giada is a revolving cash flow securitisation collateralised by a portfolio of performing unsecured loans to Italian corporates, small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. The loans were granted by Intesa SanPaolo S.p.A. (ISP or the Originator). 7.5% of the initial portfolio was originated by several different regional banks, fully owned by ISP.

The initial valuation date when the economic effect of the portfolio transfer started was 9 November 2020. As of the initial valuation date, the portfolio consisted of 54,173 loans extended to 46,160 borrowers, with an aggregate par balance of EUR 10.06 billion, of which EUR 10.82 million were in arrears for less than 30 days and EUR 3.23 million were in arrears for more than 30 days but less than 150 days.

The transaction includes a 26-month revolving period, scheduled to end in March 2023 (included), during which time the Originator may sell new receivables (i.e., further portfolios) to the Issuer subject to certain conditions and limitations. The revolving period will end prematurely if certain events occur, including the cumulative gross default rate exceeding 8.5%, the inability to fully replenish the cash reserve, and the insolvency of the Originator. During the revolving period, the purchase of new receivables will be funded through principal collections.

The Class A Notes benefit from a total credit enhancement of 34.3%, which is provided by the overcollateralisation of the portfolio. The transaction includes a cash reserve, funded at closing through a subordinated loan, which will be available to cover expenses, senior fees, and interest on the Class A Notes. The target cash reserve is equal to 1.7% of the Class A Notes, and any released amount not used to pay expenses, senior fees, and interest on the Class A Notes will be used to pay down principal on the subordinated loan.

DBRS Morningstar based its analysis on a stressed portfolio created considering the scheduled amortisation plan of the initial portfolio and the purchase conditions on further portfolios.

The initial portfolio consists of unsecured loans with a weighted average original term of 5.0 years and weighted average life (WAL) of 2.5 years. The weighted average probability of default of the initial portfolio is 1.2%.
The purchase conditions during the revolving period limit the maximum weighted average residual term of the further portfolios to 6.0 years and the maximum weighted average internal probability of default of further portfolios to 1.8%. The stressed portfolio was built considering the characteristics of the initial portfolio on the portion still outstanding after the end of the revolving period and the characteristics of the replaced portfolio built in line with the purchase conditions.

The initial portfolio exhibits a relatively low sector concentration. Building & Development is the largest sector of the portfolio, with a weight of 11.9%. The second and third largest industries are Industrial equipment and Business equipment & services, which represent 10.8% and 7.5% of the pool, respectively. Purchase conditions limit the concentration on top industries on the subsequent portfolios and the stressed portfolio was built accordingly.

The portfolio is very granular and the top borrower group represents 0.1% of the portfolio, while the top 10 and the top 20 borrower groups represent 1.0% and 1.7%, respectively. Purchase conditions limit the concentration on top one borrower on the aggregated portfolio at 0.4% and the limit was considered in the creation of the DBRS Morningstar stressed portfolio.

The portfolio is well diversified across Italy, with 64.9% of the portfolio concentrated in the north of Italy. Higher concentration is in the regions of Lombardy (26.1%), Veneto (13.4%) and Emilia Romagna (11.1%).

58.8% of the initial portfolio benefit from the Fondo Centrale di Garanzia (FCG) Guarantee. The guarantee covers on average 86.9% of the guaranteed loans outstanding notional. Pursuant to the purchase conditions, the minimum amount of loans purchased that benefit from the FCG Guarantee is 30.0% before 31 December 2021, and 15.0% thereafter. The unsecured recovery rates have been adjusted to recognise the benefit of the guarantee. In its credit analysis, DBRS Morningstar did not give full credit to the guarantee for rating scenarios above BBB (high) (sf), in line with the current long-term issuer rating of the Italian sovereign. Moreover, DBRS Morningstar assumed that in all rating scenarios a portion of the guarantee would not be honoured to account for possible rescissions of the guarantee due to noncompliance with the terms.

The transaction is materially exposed to the risk of set-off as it represents 48.5% of the initial portfolio balance. (reduced to 27.7% if all borrowers opt to claim the first EUR 100,000 covered by the deposit guarantee scheme). An Additional Cash Reserve, to be funded through a subordinated loan when the rating of ISP is downgraded below BB (high) for an amount equal to EUR 900 million, partially mitigates the risk. As a result, we assumed a set-off risk loss of EUR 662.35 million in our analysis which was deducted from the portfolio balance.

ISP is a dominant counterparty for the transaction as it acts as servicer, account bank, and paying agent and holds the servicer collection account, the collection account, the cash reserve account, the investment account and the payment account. Based on the account bank’s rating and the replacement provisions included in the transaction documents, DBRS Morningstar considers the risk of such counterparty to be consistent with the rating assigned, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar determined its rating based on the principal methodology and the following analytical considerations:
-- The probability of default (PD) for the portfolio was determined using the historical performance information supplied. DBRS Morningstar assumed an annualised PD of 2.1% for the outstanding portfolio after the end of the revolving period, and an annualised PD of 1.8% and 2.3% for the replenished portfolio granted to corporate and retail borrowers, respectively. Additional adjustments were applied in the context of the current Coronavirus Disease (COVID-19) pandemic.
--The assumed weighted-average life (WAL) of the portfolio was 2.9 years.
-- The PDs and WAL were used in the DBRS Morningstar Diversity Model to generate the hurdle rate for the assigned rating.
-- The recovery rate was determined by giving partial credit to the FCG Guarantee. Recovery rate is 27.8% at the A (sf) rating level.
-- The breakeven rates for the interest rate stresses and default timings were determined using DBRS Morningstar’s cash flow tool.

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.

INFORMATION ON COVID-19
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 SME transactions, some meaningfully. The rating is based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar increased the expected default rate for obligors in certain industries based on their perceived exposure to the adverse disruptions 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 2 December 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/370672 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 Structured Credit transactions and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar commentary: https://www.dbrsmorningstar.com/research/361098.

ESG CONSIDERATIONS
DBRS Morningstar considered that the presence of loans backed by the FCG Guarantee was a social factor (Social Impact of Product & Services) as outlined within the DBRS framework – “DBRS Morningstar’s Approach to Environmental, Social and Governance Risk Factors in Credit Ratings”. DBRS Morningstar assumed reduced loss severity for the loans which are backed by FCG Guarantee. This is credit positive and impacts the rating, given the reduced loss expectations for guaranteed loans.

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 rating is: “Rating CLOs Backed by Loans to European SMEs” (30 September 2020).

DBRS Morningstar 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 is based on a stressed portfolio considering the replenishment criteria set forth in the transaction legal documents.

Other methodologies referenced in this transaction 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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments

The sources of data and information used for this rating include performance data relating to the receivables provided by the Originator, Intesa SanPaolo S.p.A.

DBRS Morningstar received the following data information, split by sector of economic activity:
-- Static quarterly default and prepayment data from Q4 2010 to Q3 2020;
-- Dynamic quarterly delinquency data from Q4 2010 to Q3 2020.

DBRS Morningstar also received the following data information, split by corporate and retail borrower:
-- Static annual recovery data from 2000 to 2018;
-- Rating migration matrix for the year 2018-2019.

In addition, DBRS Morningstar received loan-level characteristics, contractual amortisation profile and set-off exposure as at 9 November 2020.

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

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 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.

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

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

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- Probability of Default Rates Used: Base Case PD of 2.9%, a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 27.8% at the A (sf) stress level, 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.

DBRS Morningstar 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 confirmation of the Class A2 Notes at A (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 of the Class A Notes at A (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 U.S. regulations only.

Lead Analyst: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 21 December 2020

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

-- Rating CLOs Backed by Loans to European SMEs (30 September 2020) and DBRS Morningstar SME Diversity Model v2.4.1.0, https://www.dbrsmorningstar.com/research/367642/rating-clos-backed-by-loans-to-european-smes.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Cash Flow Assumptions for Corporate Credit Securitizations (21 July 2020), https://www.dbrsmorningstar.com/research/364311/cash-flow-assumptions-for-corporate-credit-securitizations.
-- Rating CLOs and CDOs of Large Corporate Credit (21 July 2020), https://www.dbrsmorningstar.com/research/364310/rating-clos-and-cdos-of-large-corporate-credit.
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020), https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- DBRS Morningstar's Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (10 March 2020), https://www.dbrsmorningstar.com/research/357792/dbrs-morningstars-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.