Press Release

DBRS Morningstar Upgrades and Confirms Ratings on Eridano II SPV S.r.l.

Consumer Loans & Credit Cards

September 22, 2021

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by Eridano II SPV S.r.l. (Eridano II or the Issuer):

-- Class A Asset-Backed Floating-Rate Notes (Class A Notes) confirmed at AA (low) (sf)
-- Class B Asset-Backed Floating-Rate Notes (Class B Notes) upgraded to A (high) (sf) from A (sf)

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date. The rating on the Class B Notes addresses the ultimate payment of interest and the ultimate repayment of principal by the final maturity date while junior to the Class A Notes, but the timely payment of interest when they are the most-senior tranche, in accordance with the Issuer’s default definition in the transaction documents.

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 August 2021 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective rating levels; and
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Eridano II is a static securitisation of receivables related to salary and pension assignment loans as well as payment delegation loans originated by ViViBanca S.p.A. and MCE Locam S.p.A. (ViViBanca and MCE, respectively) and granted to employees and pensioners residing in Italy. The portfolio is serviced by ViViBanca, with MCE acting as collection agent for its subportfolio and Quinservizi S.p.A. acting as backup servicer.

PORTFOLIO PERFORMANCE
As of the July 2021 cut-off date, delinquencies were low with loans that were two to three months and more than three months in arrears representing 0.1% and 0.3% of the outstanding portfolio balance, respectively. At the same portfolio cut-off date, the gross cumulative default ratio was equal to 0.2% of the initial portfolio balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and maintained its base case PD assumption at 8.7% and updated its base case LGD assumption to 5.9% from 6.4%.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the rated notes. As of the August 2021 payment date, credit enhancement to the Class A and Class B Notes was 13.0% and 4.7%, respectively, up from 10.5% and 3.5%, respectively, as of the initial rating date in October 2020. The increase in credit enhancement was the main driver behind the rating upgrade on the Class B Notes.

The transaction benefits from an amortising cash reserve available to cover senior fees, swap payments, and missed interest payments on the rated notes (on the Class B Notes, only prior to an interest subordination event). The reserve is currently at its target level of EUR 6.0 million, or 2.0% of the rated notes outstanding balance, and is floored at EUR 3.5 million.

The transaction also features a prepayment reserve available to cover losses arising from the set-off of capitalised fees. The prepayment reserve is currently at its target level of EUR 582,000.

BNP Paribas Securities Services, Milan branch acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on the account bank, 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 ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

An interest rate swap is in place to hedge fixed-floating interest rate risk, with Société Générale, S.A. acting as the swap counterparty. Based on the swap counterparty’s Long-Term Issuer Rating of A (high) and the collateral posting provisions included in the documentation, DBRS Morningstar considers the risk arising from the swap counterparty to be consistent with the ratings assigned to the notes, in accordance with the “Derivative Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases 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 ABS transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar conducted additional sensitivity analysis to determine that the transaction benefit from sufficient liquidity support to withstand potential payment holidays in the portfolio.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus is likely to affect the DBRS Morningstar-rated ABS transactions in Europe, for more details please see https://www.dbrsmorningstar.com/research/360734/european-abs-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.

ESG CONSIDERATIONS
The high exposure to public-sector employees, pensioners, and civil servants makes the transaction dependent on the creditworthiness of the Italian sovereign. DBRS Morningstar considers some of the key drivers behind the latest rating action on Italy—namely Institutional Strength, Governance & Transparency, and Human Capital and Human Rights—to be significant rating factors. According to the latest World Bank governance indicators, Italy ranks in the 62nd percentile for Rule of Law in 2019 and, according to the International Monetary Fund, Italy’s GDP per capita of USD 33,200 in 2019 was low compared with its euro area peers. These factors were taken into account in the Economic Structure and Performance and Political Environment building block of DBRS Morningstar’s “Global Methodology for Rating Sovereign Governments”.

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 “Master European Structured Finance Surveillance Methodology” (8 February 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.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating actions.

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 servicer reports and additional information provided by ViViBanca, payment and investor reports provided by Banca Finanziaria Internazionale S.p.A., and loan-level data provided by the European DataWarehouse GmbH.

DBRS Morningstar did not rely upon third-party due diligence 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 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.

These are the first rating actions since the initial rating date.

The lead analyst responsibilities for this transaction have been transferred to Daniele Canestrari.

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):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.

-- The base case PD and LGD of the current pool of loans for the Issuer are 8.7% and 5.9%, respectively.

-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to fall to at A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected fall to A (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to A (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (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.

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

Lead Analyst: Daniele Canestrari, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 5 October 2020

DBRS Ratings GmbH
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60311 Frankfurt am Main – Deutschland
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: 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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