Press Release

DBRS Morningstar Confirms Rating on Valconca SPV S.r.l. (SME) Following Amendment

Structured Credit

July 28, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating on the Class A Notes issued by Valconca SPV S.r.l. (SME) (Valconca SME or the Issuer) at A (high) (sf) following an amendment to the transaction (the Amendment).

The confirmation follows an entire review of the transaction and is based on the following analytical considerations:
-- The Amendment to the transaction executed on 28 July 2021, which primarily includes the transfer of an additional portfolio (the Additional Portfolio), with economic effects from 30 June 2021, financed with further notes’ subscription;
-- The portfolio performance in terms of delinquencies, defaults, and losses as of the April 2021 payment date;
-- Updated base case assumptions, considering the updated quarterly 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 (high) (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 the ultimate repayment of principal payable on or before the maturity date in October 2060.

The increase on the recovery assumptions related to guarantees provided by the Fondo Centrale di Garanzia (FCG) on a significant percentage of the loans in the portfolio, better performance on the historical data despite the additional adjustment due to the coronavirus pandemic, and a decrease in the weighted-average life prompted the confirmation of the rating on the Class A Notes.

Valconca SME 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 Banca Popolare Valconca S.p.A. (the Originator or the Servicer).

AMENDMENTS
The Additional Portfolio is equal to EUR 171.52 million and was transferred to the Issuer on 16 July 2021. As of the 30 June 2021 cut-off date, the Additional Portfolio composed 57.2% of the outstanding balance of the Aggregate Portfolio while the existing portfolio composed the remaining 42.8%.

On 28 July 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 target amount, equal to 2.0% of the Class A Notes’ principal amount outstanding.

Before the Amendment:
-- The Class A Notes were issued for a nominal balance of EUR 155.00 million while the principal amount outstanding was EUR 64.46 million as at the July 2021 payment date (41.59% pool factor);
-- The Class J Notes were issued for a nominal balance of EUR 66.35 million while the principal amount outstanding was EUR 66.35 million as at the January 2021 payment date (100.0% pool factor).

On the Increase Date:
-- An additional amount of EUR 150.79 million of Class A Notes was issued (for a total outstanding balance of EUR 215.26 million);
-- An additional amount of EUR 23.71 million of Class J Notes was issued (for a total outstanding balance of EUR 90.06 million).

PORTFOLIO PERFORMANCE AND KEY DRIVERS
As at the June 2021 servicing report, the existing collateral portfolio consisted of 783 loans with an aggregate principal balance of EUR 128.7 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 0.05%. The cumulative default ratio represents 1.7% of the aggregate portfolio balance.

As of 30 June 2021, the Aggregate Portfolio consisted of 2,895 loans for a total principal balance of EUR 299.94 million (excluding defaulted loans). The Aggregate Portfolio is composed of senior unsecured loans representing 43.30% of the portfolio outstanding balance, 74.0% of which benefits from the FCG guarantee. Mortgage-backed loans represent the remaining 56.70% of the portfolio outstanding balance.

The Aggregate Portfolio exhibits a high geographic concentration in the Italian region of Emilia-Romagna, which accounts for 76.23% 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 and development, lodging and casinos, and food service, which represent 37.15%, 16.84%, and 6.56% of the portfolio outstanding balance, respectively. The Aggregate Portfolio has a relatively high borrower concentration as the largest, top five, and top 10 borrower groups account for 1.6%, 6.3%, and 10.5% of the portfolio outstanding balance, respectively.

The transaction is exposed to set-off risk as it represents 2.8% of the Aggregate Portfolio (giving credit to the deposit guarantee scheme). At closing, the set-off exposure represented 2.5% 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 4.97% and 4.43% from 5.17% and 5.51% for mortgage and nonmortgage loans, respectively.

DBRS Morningstar’s analysis considered the Aggregate Portfolio as well as the maximum loan-term modifications that allow loan maturity 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 Foreign Currency Issuer Rating on 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 (high) (sf) rating level, the portfolio default rate and recovery rate assumptions that DBRS Morningstar applied in the analysis were 53.7% and 48.3%, respectively.

CREDIT ENHANCEMENT
Overcolleralisation of the outstanding collateral portfolio and the cash reserve provide credit enhancement to the Class A Notes. As at the April 2021 payment date, credit enhancement to the Class A Notes was 49.5%, decreasing to 29.5% 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.

An amortising cash reserve, funded at closing through the proceeds of the Class J Notes for an amount of EUR 3.10 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 4.31 million using the proceeds from the additional Class J Notes issuance.

The required level post-Increase Date remains at 2.0% of the Class A Notes principal amount outstanding, subject to a EUR 1.1 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 DBRS Morningstar’s private rating on 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 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 Excel-based cash flow engine.

The coronavirus and the resulting isolation measures have caused an economic contraction, leading to 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, 39.9% 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 times (x) and 2.0x, respectively, as per the commentaries mentioned below.

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/362712/european-structured-finance-covid-19-credit-riskexposure-roadmap. 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.

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: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings”. DBRS Morningstar assumed reduced loss severity for the loans that are backed by the FCG guarantee. This is credit positive and affects 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 (28 June 2021).

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 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 legal documents was not conducted as these 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/381451/global-methodology-forrating-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 an investor report provided by the calculation agent.

DBRS Morningstar received the following data information, split by mortgage and nonmortgage loans:
-- Static annual default and recovery data from Q1 2000 to Q1 2021;
-- Dynamic quarterly default data from Q1 2000 to Q1 2021;
-- Dynamic quarterly delinquency data from Q1 2000 to Q1 2021;
-- Dynamic quarterly prepayment data from Q1 2000 to Q1 2021.

DBRS Morningstar also received data information on the FCG guarantee enforcement.

In addition, DBRS Morningstar received loan-level characteristics, contractual amortisation profile, and set-off exposure as at 30 June 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 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 10 July 2020, when DBRS Morningstar confirmed the rating on the Class A Notes at A (high) (sf).

The lead analyst responsibilities for this transaction have been transferred to María López.

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 4.97% and 4.43% for mortgage and nonmortgage loans, respectively, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 48.3% at the A (high) (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 10% and a hypothetical decrease in the recovery rate by 10% would 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: http://cerep.esma.europa.eu/cerepweb/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: María López, Senior Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 25 July 2018

DBRS Ratings GmbH, Sucursal en España
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Spain
Tel. +34 (91) 903 6500

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Tel. +49 (69) 8088 3500
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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.

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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