Press Release

DBRS Morningstar Upgrades and Confirms Ratings of Civitas SPV S.r.l. - Series 2019-1 and Removes Under Review with Negative Implications Status

Structured Credit

July 13, 2021

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by Civitas SPV S.r.l. - Series 2019-1 (the Issuer):

-- Class A Notes upgraded to AA (low) (sf) from A (high) (sf)
-- Class B Notes confirmed at BBB (low) (sf)

DBRS Morningstar also removed the rating of the Class B Notes from its Under Review with Negative Implications status (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 ultimate repayment of principal on or before the final maturity date in October 2055. The rating on the Class B Notes addresses the timely payment of interest and ultimate repayment of principal on or before the final maturity date, in accordance with the transaction documentation.

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the April 2021 payment date;
-- Base case probability of default (PD) and updated default and recovery rates on the remaining receivables;
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels;
-- The release of DBRS Morningstar’s SME Diversity Model v2.5.0.0;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19).

The transaction is a static cash flow securitisation collateralised by a portfolio of loans to small and medium-size enterprises (SME), entrepreneurs, artisans, and producer families based in Italy. The transaction closed in October 2019. Banca di Cividale S.p.A. (Banca di Cividale) granted and services the loans. At closing, the EUR 451.0 million portfolio consisted of both secured (77.0% of the initial portfolio balance) and unsecured (23.0%) loans, and was concentrated in Friuli-Venezia Giulia (61.7%) and Veneto (33.6%).

PORTFOLIO PERFORMANCE
As of 30 June 2021, loans in early arrears (0 to 30 days delinquent) represented 3.1% of the outstanding portfolio balance, while the share of loans in arrears more than 90 days was insignificant. Gross cumulative defaults amounted to 1.9% of the initial portfolio balance, with recoveries of 6.2% to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and recovery rate assumptions to 40.8% and 64.8%, respectively.

Following the release of the SME Diversity Model v2.5.0.0, DBRS Morningstar updated its lifetime default assumptions at the AA (low) (sf) and BBB (low) (sf) rating levels to 64.8% and 51.8%, respectively, including coronavirus-related adjustments. As per DBRS Morningstar’s assessment, 1.8% and 27.6% of the outstanding portfolio balance represented industries classified in mid-high and high risk economic sectors, respectively, which led to the underlying one-year PD to be multiplied by 1.5 and 2.0 times, respectively, as per the relevant commentaries mentioned below.

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.

CREDIT ENHANCEMENT
The subordination of the respective junior obligations provides credit enhancement to the Class A and Class B Notes. As of the April 2021 payment date, credit enhancement to the Class A Notes increased to 36.5% from 32.8% at the time of the last annual review in October 2020, while credit enhancement to the Class B Notes increased to 22.1% from 19.8%.

The transaction benefits from liquidity support provided by an amortising cash reserve, available to cover senior expenses, interest payments on the Class A Notes and, as long as the Mezzanine Notes Trigger is not breached, interest payments on the Class B Notes. The reserve amortises to a target balance of 2.0% of the Class A and Class B Notes, subject to a floor of EUR 1.85 million and, as of the April 2021 payment date, was at its target balance of EUR 5.6 million.

BNP Paribas Securities Services, Milan branch (BNPPSS Milan) acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of BNPPSS Milan, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, 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.

DBRS Morningstar analysed the structure of the transaction in its proprietary cash flow engine.

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 ratings are based on additional analysis and, where appropriate, additional stresses 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 enterprises operating in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus, and 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 30 June 2021, 74.6% of the outstanding collateral portfolio was benefiting from COVID-19 payment holidays, primarily from the Cura Italia governmental decree.

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 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-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 the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

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 ratings is the “Rating CLOs Backed by Loans to European SMEs” (28 June 2021). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the 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.

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.

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/381451/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports provided by Securitisation Services S.p.A. (the Computation Agent), servicer reports provided by Banca di Cividale, 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 ratings, 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 purpose 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 action on this transaction took place on 14 April 2021, when DBRS Morningstar placed its BBB (low) (sf) rating on the Class B Notes UR-Neg. Previously, on 16 October 2020, DBRS Morningstar confirmed its A (high) (sf) and BBB (low) (sf) ratings on the Class A and Class B Notes, respectively.

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):

-- PD used: Base case PD of 7.1% for mortgage loans and 4.4% for nonmortgage loans, a 10% and 20% increase on the base case PD.
-- Recovery rates used: Base case recovery rate of 64.8, a 10% and 20% decrease in the base case recovery rate.

DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would not impact the AA (low) (sf) rating of the Class A Notes or the BBB (low) (sf) rating of the Class B Notes. A hypothetical decrease of the base case recovery rate by 20%, ceteris paribus, would result in a decrease of the rating of the Class A Notes to A (high) (sf) and a decrease in the rating of the Class B Notes to BB (high) (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% would not affect the AA (low) (sf) rating of the Class A Notes, but would result in a decrease in the rating of the Class B Notes to BB (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.

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

Lead Analyst: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 17 October 2019

DBRS Ratings GmbH
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Geschäftsführer: Detlef Scholz
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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.

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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