Press Release

DBRS Morningstar Downgrades Rating on Magnolia BTV S.r.l. Following Amendment

Structured Credit

March 23, 2021

DBRS Ratings GmbH (DBRS Morningstar) downgraded its rating on the Class A Notes issued by Magnolia BTV S.r.l. (the Issuer) to A (sf) from A (high) (sf), following an amendment to the transaction (the Amendment).

The downgrade follows an entire review of the transaction and is based on the following analytical considerations:
-- The Amendment to the transaction executed on 22 March 2021 which includes, primarily, the transfer of an additional portfolio (the Additional Portfolio), with economic effects from 28 February 2021, financed with further notes’ subscription, and the decrease of the cash reserve target amount to 1.5% from 2.0% of the Class A Notes;
-- The portfolio performance in terms of delinquencies, defaults, and losses as of the January 2021 payment date;
-- Updated base case assumptions, considering the updated monthly historical performance data received by DBRS Morningstar, and the one-year probability of default (PD), recovery rate, and expected loss assumptions considering the aggregate of the existing portfolio and the Additional Portfolio (together, the Aggregate Portfolio);
-- The current available credit enhancement to the Class A Notes to cover expected losses assumed at the A (sf) rating level; and
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The rating on the Class A Notes addresses the timely payment of interest and ultimate repayment of principal payable on or before the maturity date in July 2045.

The decrease in credit enhancement coupled with the additional coronavirus-related adjustments and the increase of the set-off exposure described in the below paragraphs prompted the downgrade of the Class A Notes.

Magnolia BTV S.r.l. is a securitisation collateralised by a portfolio of secured and unsecured loans to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families granted and serviced by Banco delle Tre Venezie S.p.A. (the Originator or the Servicer).

AMENDMENTS
The Additional Portfolio is equal to EUR 139.52 million and was transferred to the Issuer on 16 March 2021. As of the 28 February 2021 cut-off date, the Additional Portfolio composed 53.7% of the outstanding balance of the Aggregate Portfolio, while the remaining 46.3% was made up of the existing portfolio.

On 23 March 2021 (the Increase Date), the Class A and Class J Notes nominal balances were increased to finance the purchase of the Additional Portfolio and to replenish the cash reserve up to the new target amount, equal to 1.5% of the Class A Notes principal amount outstanding (down from 2.0%).

Before the Amendment:
-- The Class A Notes were issued for a nominal balance of EUR 142.90 million, while the principal amount outstanding was EUR 82,712,692.08, as at the January 2021 payment date (57.9% pool factor);
-- The Class J Notes were issued for a nominal balance of EUR 47.52 million, while the principal amount outstanding was EUR 47.52 million as at the January 2021 payment date (100.0% pool factor).

On the Increase Date:
-- An additional amount of EUR 201.40 million of Class A Notes was issued (for a total nominal balance of EUR 344.30 million), while the principal amount outstanding of the Class A Notes was EUR 199,286,073.36 (57.9% pool factor);
-- An additional amount of EUR 24.32 million of Class J Notes was issued (for a total nominal balance of EUR 71.84 million), while the principal amount outstanding of the Class J Notes was EUR 71.84 million (100.0% pool factor).

PORTFOLIO PERFORMANCE AND KEY DRIVERS
As at the January 2021 payment date, the existing portfolio consisted of 365 loans with an aggregate principal balance of EUR 128.38 million (excluding defaulted loans).

The delinquency ratio, defined as the ratio between the outstanding balance of loans in arrears by more than 90 days (excluding defaulted loans) and the outstanding balance of the portfolio as of the end of the previous collection period, was 0.1%. The cumulative default ratio was 3.9% of the initial portfolio.

As of 28 February 2021, the Aggregate Portfolio consisted of 763 loans for a total principal balance of EUR 259.83 million (excluding defaulted loans). The Aggregate Portfolio is composed of senior unsecured loans representing 51.8% of the portfolio outstanding balance, out of which 85.4% benefits from the Fondo Centrale di Garanzia (FCG) Guarantee. Mortgage-backed loans represent the remaining 48.2% of the portfolio outstanding balance.

The Aggregate Portfolio exhibits a high geographic concentration in the Italian region of Veneto, which accounts for 86.4% of the portfolio outstanding balance. The geographic concentration reflects the bank’s significant presence in the region. The top three sector exposures, according to DBRS Morningstar’s industry classifications, are building & development, farming/agriculture, and business equipment & services, which represent 40.4%, 9.3%, and 9.0% of the portfolio outstanding balance, respectively. The Aggregate Portfolio has a high borrower concentration, as the largest, top five and top 10 borrower groups account for 1.9%, 7.3%, and 12.9% of the portfolio outstanding balance, respectively.

The transaction is exposed to the risk of set-off as it represents 10.8% of the Aggregate Portfolio (by giving credit to 90.0% of the EUR 100,000 deposit guarantee scheme). At closing, the set-off exposure represented 6.5% of the initial portfolio.

PORTFOLIO ASSUMPTIONS
Based on the updated historical data provided by the Originator and considering the performance observed, DBRS Morningstar updated its base case PD assumptions to 4.2% and 3.7%, from 3.9% and 3.4%, for mortgage and nonmortgage loans, respectively.

DBRS Morningstar’s analysis considered the Aggregate Portfolio, as well as the maximum loan-term modifications that allow loans’ maturities extensions. The unsecured recovery rates have been adjusted to recognise the benefit of the FCG 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 resulting from noncompliance with the terms.

At the A (sf) rating level, the portfolio default and recovery assumptions applied in the analysis were 46.5% and 57.1%, respectively.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio and the cash reserve provide credit enhancement to the Class A Notes. As at the January 2021 payment date, credit enhancement to the Class A Notes was 37.0% , decreasing to 26.7% post-Increase Date as a result of the new subordination levels following the transfer of the Additional Portfolio and further issuance of Class A and Class J Notes. The credit enhancement post-Increase Date also includes principal collections credited on the Issuer’s account as of 28 February 2021.

An amortising cash reserve, funded at closing through the proceeds of the Class J Notes for an amount of EUR 2.84 million, is available to cover senior expenses and interest payments on the Class A Notes. The required level for the cash reserve was initially set at 2.0% of the Class A Notes principal amount outstanding. On the Increase Date, the cash reserve will be topped-up to EUR 2.99 million using the proceeds from the Class J Notes further issuance . The required level post-Increase Date is lowered to 1.5% of the Class A Notes principal amount outstanding, subject to a EUR 0.71 million floor. On the payment date on which the Class A Notes will be redeemed in full, the cash reserve required level will be reduced to EUR 0.

BNP Paribas Securities Services, Milan branch (BNP Milan) acts as account bank for the transaction. Based on the DBRS Morningstar private rating of BNP Milan, the downgrade provisions outlined in the transaction documents, and structural mitigants 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 Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

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 continue to increase 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. As per DBRS Morningstar’s assessment, 17.8% of the Aggregate Portfolio balance belonged to industries classified in mid-high- and high-risk economic sectors, which leads to the underlying one-year PDs to be multiplied by 1.5 and 2.0, respectively, as per the commentaries mentioned below.

In addition, DBRS Morningstar conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolio. As of 28 February 2021, around 47.9% of the Aggregate Portfolio balance benefitted from a coronavirus-related payment moratorium. The majority of payment suspensions are on the whole instalment (principal plus interest) and expiring in June 2021. DBRS Morningstar concluded that at current interest rate levels and in a scenario where the whole portfolio would be in payment holiday, the cash reserve would provide enough liquidity support to cover stressed senior expenses and interest on the Class A Notes for 1.5 years.

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 last updated on 17 March 2021. For details see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-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 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 Morningstar Criteria – “DBRS Morningstar Criteria: 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

DBRS Morningstar conducted a review of the amended transaction documents, including, inter alia, the Master Amendment Agreement. A review of any other transaction’s legal documents was not conducted as the these 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 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, directly or through the arranger, Banca Finanziaria Internazionale S.p.A., servicer reports provided by the Servicer, and investor report provided by the calculation agent.

DBRS Morningstar received the following data information, split by mortgage and non-mortgage loans:
-- Static annual default and recovery data from 2012 to 2020;
-- Dynamic monthly default data from January 2012 to December 2020;
-- Dynamic monthly delinquency data from January 2012 to December 2020;
-- Dynamic monthly prepayment data from January 2012 to December 2020.

DBRS Morningstar also received data information on the FCG Guarantee enforcement from October 2016 to January 2021.

In addition, DBRS Morningstar received loan-level characteristics, contractual amortisation profile and set-off exposure as at 28 February 2021.

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

At the time of the initial rating and of the transaction amendment 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.

The last rating action on this transaction took place on 31 July 2020, when DBRS Morningstar confirmed the rating of the Class A Notes at A (high) (sf).

The lead analyst responsibilities for this transaction have been transferred to Ilaria Maschietto.

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):
-- PD Rates Used: Base case PD of 4.2% and 3.7% for mortgage and nonmortgage loans, respectively, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 57.1% at the A (sf) rating level, and 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%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf). A hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf). A scenario combining both a hypothetical increase in the PD by 20% and a hypothetical decrease in the recovery rate by 20% would lead to a downgrade of the Class A Notes to BBB (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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 31 July 2019

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

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.

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