Press Release

DBRS Morningstar Confirms Rating on Fanes S.r.l. – Series 2020-1 and Removes UR-Neg. Status

Structured Credit

May 17, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its A (sf) rating on the Series 2020-1-A Notes (the Class A Notes) issued by Fanes S.r.l. (the Issuer).

DBRS Morningstar also removed the rating from Under Review with Negative Implications (UR-Neg.), where it was placed on 14 April 2021. For more information, please see this press release: https://www.dbrsmorningstar.com/research/376738/dbrs-morningstar-places-nine-ratings-of-seven-european-structured-finance-transactions-under-review-following-an-asset-model-error.

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal by the final maturity date.

The confirmation 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 March 2021 payment date;
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the A (sf) rating level;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic;
-- No purchase termination events or breach of purchase conditions to date; and
-- The release of DBRS Morningstar’s SME Diversity Model v2.5.0.0.

The transaction is a revolving cash flow securitisation collateralised by a portfolio of mortgage and nonmortgage loans to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. The portfolio was originated and is serviced by Cassa di Risparmio di Bolzano S.p.A. (CR Bolzano). Banca Finanziaria Internazionale S.p.A. (Banca Finanziaria) is the backup servicer facilitator for the transaction. The transaction closed in June 2020, when the Class A and Class J Notes (the Notes) were issued on a partially paid basis and initial subscriptions prices of EUR 479.3 and EUR 269.6 million, respectively, were paid. The nominal amounts are equal to EUR 3,000.0 million and EUR 1,000.0 million for the Class A and Class J Notes, respectively.

The transaction is structured with a 24-month ramp-up period, scheduled to end in June 2022. CR Bolzano may sell new receivables to the Issuer during the ramp-up period, subject to certain conditions and limitations. The ramp-up period will terminate early if certain events occur, including the cumulative gross default rate exceeding 10.0%, the cash reserve not being at target, and the delinquency ratio exceeding 8.0% for three consecutive payment dates.

During the ramp-up period, the Issuer will fund the purchase of new receivables either through portfolio collections and/or payments of further instalments under the Notes (subject to a minimum subordination provided by the Class J Notes equal to 36.0%). In the three payment dates following the issue date, no further portfolios were sold to the Issuer. The Issuer used the collections to repay principal on the Class A Notes, which have a current balance of EUR 412.3 million.

There is an implicit principal deficiency ledger mechanism in place, whereby provisioning occurs when a loan is classified as defaulted (i.e., classified as sofferenza or in arrears for 180 days or more). However, if the ramp-up period terminates early, the implicit undercollateralisation exceeds 5.0%, or the cumulative gross default ratio exceeds 10.0%, the transaction will start trapping all excess spread to amortise the Class A Notes.

PORTFOLIO PERFORMANCE
As of the February 2021 cut-off date, delinquencies were low with loans in the 30- to 60-day arrears bucket representing 0.1% of the outstanding portfolio balance. No loans were classified in the 60- to 90-day and 90+-day arrears bucket. Despite low arrears, a significant portion of the portfolio was under payment holidays. As of February 2021, the servicer did not report any defaulted loans.

Furthermore, the current portfolio shows a significant geographic concentration in the regions of Trentino-Alto Adige and Veneto (76.0% and 18.5%, respectively) as well as a moderate sector concentration as lodging and casinos, building and development, and farming/agriculture are the top three sectors (based on DBRS Morningstar’s industry classification) representing 28.7%, 22.4%, and 14.6% of the portfolio, respectively.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar continued to base its analysis on a worst-case portfolio created in line with the purchase conditions and the common and specific criteria applicable during the ramp-up period. As the purchase conditions limit the portion of mortgage loans in the portfolio between a minimum of 50.0% and a maximum of 70.0%, DBRS Morningstar’s analysis was based on the minimum portion of mortgage loans in the portfolio as it carries the highest loss expectations because of the lower associated recovery rates.

DBRS Morningstar maintained the base case one-year PD for mortgage and nonmortgage loans at 4.3% and 2.8%, respectively, on top of which DBRS Morningstar applied additional coronavirus-related adjustments. As a result, DBRS Morningstar maintained a worst-case portfolio weighted-average (WA) one-year PD of 5.3%.

Following the release of the SME Diversity Model v2.5.0.0, DBRS Morningstar updated its lifetime default and recovery assumptions at the A (sf) rating level to 54.3% and 36.0%, respectively, after considering coronavirus-related adjustments.

Finally, DBRS Morningstar considered recovery rates for mortgage and nonmortgage loans of 70.8% and 16.2%, respectively, at the A (sf) rating level as well as maintained the assumed WA life of the portfolio at 5.3 years.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding portfolio and the cash reserve provide credit enhancement to the Class A Notes. As of the March 2021 payment date, credit enhancement to the Class A Notes was 40.1%, up from 36.3% at transaction closing. During the ramp-up period, credit enhancement to the Class A Notes is subject to a floor of 36.0%.

The transaction includes a cash reserve available to cover expenses, senior fees, and interest payments on the Class A Notes. The target is equal to the greater of 2.0% of the Class A Notes principal outstanding balance and 1.29% of the collateral portfolio, with a floor of EUR 2.4 million. As further portfolios are transferred to the Issuer, the cash reserve will increase to 1.29% of the aggregate collateral portfolio. On the payment date on which the Class A Notes will be redeemed in full, the target amount will be zero (so the Issuer can use the reserve to repay principal on the Class A Notes). As of the March 2021 payment date, the cash reserve was at its target level of EUR 8,731,375.

BNP Paribas Securities Services SCA/Milan (BNP Milan) acts as the account bank. Based on DBRS Morningstar’s private rating on BNP Milan, 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 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 its proprietary 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 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, 3.7% and 39.3% of the outstanding portfolio balance belonged to industries classified in mid-high- and high-risk economic sectors, respectively, which leads to the underlying one-year PDs to be multiplied by 1.5 times (x) and 2.0x, 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 71.0% of the portfolio balance was under a coronavirus-related payment moratorium, with the majority of payment suspensions on the whole instalment (principal plus interest). CR Bolzano confirmed that, as of the 31 March 2021 cut-off date, around 40.0% of such portion terminated the payment holiday period.

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.

On 18 May 2020, DBRS Morningstar released its “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary, where 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 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.

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.

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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “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: https://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 this rating include investor reports provided by Banca Finanziaria, servicer reports and additional information provided by CR Bolzano, 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 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 14 April 2021, when DBRS Morningstar placed its A (sf) rating on the Class A Notes UR-Neg.

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 for mortgage and nonmortgage loans of 4.3% and 2.8%, respectively, a 10% and 20% increase of the base case PD.

-- Recovery Rates Used: Base case recovery rate of 36.0% at the A (sf) stress level, a 10% and 20% decrease in the base case recovery rates.

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 downgrade of the Class A Notes to BBB (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would also lead to a downgrade of the Class A Notes to BBB (high) (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.

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

Lead Analyst: Daniele Canestrari, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 12 June 2020

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The rating methodologies used in the analysis of this transaction can be found at: https://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.

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