Press Release

DBRS Morningstar Upgrades and Confirms Ratings on BPL Mortgages S.r.l., Series VII

Structured Credit

April 09, 2021

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by BPL Mortgages S.r.l., Series VII (the Issuer):

-- Class A-2014 Notes upgraded to AA (high) (sf) from AA (low) (sf)
-- Series A2 – 2016 Notes upgraded to AA (high) (sf) from AA (low) (sf)
-- Class B-2014 Notes confirmed at A (sf)
-- Series B2 – 2016 Notes confirmed at A (sf)

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the February 2021 payment date.
-- The one-year base case probability of default (PD), recovery rates, and updated default rates on the remaining receivables.
-- The credit enhancement available to the rated notes to cover the expected losses at their respective rating levels.
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The ratings on the Class A-2014 and Series A2 – 2016 Notes (together, the Class A Notes) as well as on the Class B-2014 and Series B2 – 2016 Notes (together, the Class B Notes) address the timely payment of interest and ultimate payment of principal payable on or before the maturity date in November 2054.

The transaction 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 that were granted by Banco Popolare Societa Cooperativa (BP) or one of its regional banks. In January 2017, BP and Banca Popolare di Milano S.C.a.r.l. merged into Banco BPM SpA (Banco BPM).

The transaction closed in June 2014. Following a transaction restructuring in February 2016, the Issuer acquired a second portfolio from BP and sold all loans in arrears by 57 days or more in the pool as of 25 January 2016. The second portfolio included both newly originated performing loans and loans from BPL Mortgages S.r.l., Series VI, the Issuer’s previous SME collateralised loan obligation (CLO) transaction that was unwound on 19 February 2016. The Issuer financed its acquisition of the second portfolio through the new issuance of the Series A2 – 2016 Notes, the Series B2 – 2016 Notes, and the Series C2 – 2016 Notes.

The transaction was restructured again in 2018. During the 2018 restructuring, the Issuer acquired another EUR 3,716.4 million portfolio from Banco BPM and Banca Popolare di Milano S.p.A. through funds from the increase of some issued notes. The Issuer also sold all defaulted loans, loans in arrears by 51 days or more, and loans eligible for the Banco BPM covered bonds programme back to Banco BPM at par (EUR 579.2 million).

PORTFOLIO PERFORMANCE
The portfolio is performing within DBRS Morningstar’s expectations. As of February 2021, loans more than 90 days in arrears represented 0.1% of the outstanding performing portfolio collateral balance, down from 0.5% at the last annual review. The cumulative gross default ratio stood at 3.8%, up from 2.9% one year ago.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar maintained the portfolio’s one-year base case PD assumption at 5.4% prior to coronavirus-related adjustments. DBRS Morningstar updated its PD and recovery assumptions to 65.3% and 41.4%, respectively, at the AA (high) (sf) rating level, and to 57.7% and 45.4%, respectively, at the A (sf) rating level.

CREDIT ENHANCEMENT
The credit enhancement available to the Class A and B Notes continues to increase as the transaction deleverages. Credit enhancement to the Class A Notes is 81.7% (68.1% in February 2020) and credit enhancement to the Class B Notes is 67.9% (56.5% in February 2020). The credit enhancement of the rated notes considers the balance of the performing portfolio and the cash reserve. The cash reserve is at its target amount, equal to a EUR 100.0 million floor.

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

Banco BPM acts as cash account bank and holds the reserve fund. As the cash account bank reference rating of BBB is one notch below the DBRS Morningstar Long-Term Critical Obligations Rating of Banco BPM at BBB (high), which is below the Minimum Institution Rating given the ratings assigned to the Class A Notes as described in the "Legal Criteria for European Structured Finance Transactions" methodology, DBRS Morningstar did not give credit to the reserve fund in its analysis on the Class A Notes.

ESG CONSIDERATIONS
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.

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

The coronavirus 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 payment holidays and delinquencies may continue to increase in the coming months for many SME 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.

For this transaction, DBRS Morningstar increased the expected default rate on receivables granted to obligors operating in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus. As per DBRS Morningstar’s assessment, 2.2% and 15.6% of the outstanding portfolio balance represented industries classified in mid-high and high-risk economic sectors, respectively. This led the underlying one-year PDs to be multiplied by 1.5 times (x) and 2.0x, respectively, as per DBRS Morningstar’s “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary released on 18 May 2020, wherein DBRS Morningstar discussed the overall risk exposure of the SME sector to the coronavirus and provided a framework for identifying the transactions that are more at risk and more likely to be affected by the fallout of the pandemic on the economy. For more details, please see: https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

DBRS Morningstar also 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 January 2021, 57.2% of the collateral balance had been granted payment moratoriums.

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 regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Rating CLOs Backed by Loans to European SMEs” (30 September 2020).

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.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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 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 these ratings include servicer and investor reports as well as payment holiday information provided by Banco BPM, and loan-by-loan data from 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 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 this transaction took place on 10 April 2020 when DBRS Morningstar confirmed the Class A Notes at AA (low) (sf) and the Class B Notes at A (sf).

The lead analyst responsibilities for this transaction have been transferred to Helvia Meana.

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 rating, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine the rating (the base case):
-- PD Rates Used: Base case PD of 6.3%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 41.4% at the AA (high) (sf) rating 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. The base case recovery rate at the A (sf) stress level is 45.4%.

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 lead to a confirmation of the Class A Notes at AA (high) (sf). A hypothetical increase of the base case PD by 20% would lead to a confirmation of the Class B Notes at A (sf) while a hypothetical decrease of the Recovery Rate by 20%, would also lead to a confirmation of the Class B Notes at A (sf). A scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class A Notes at AA (high) (sf) and to a confirmation of the Class B 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: https://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.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Helvia Meana, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 30 June 2014

DBRS Ratings GmbH
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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:
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 https://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.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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