Press Release

DBRS Morningstar Confirms Rating on BCC SME Finance 1 S.r.l.

Structured Credit

December 03, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) rating on the Class A2 Notes issued by BCC SME Finance 1 S.r.l. (the Issuer).

The rating on the Class A2 Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2060.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the May 2021 payment date;
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables;
-- The current available credit enhancement to the Class A2 Notes to cover the expected losses at the AAA (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 transaction is a securitisation collateralised by a portfolio of secured and unsecured loans granted to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families. Loans were originally granted by 28 originators, comprising 27 Italian cooperative banks and Mediocredito Trentino-Alto Adige S.p.A. – Investitionsbank Trentino-Südtirol A.G.

PORTFOLIO PERFORMANCE
The transaction pays semiannually. The latest available performance information is as of the May 2021 payment date, when loans that were one to three months in arrears represented 0.6% of the outstanding portfolio balance, down from 3.8% at the last annual review. The 90+-day delinquency ratio was 1.1%, down from 2.2% last year, and the cumulative default ratio stood at 0.0%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated the portfolio’s weighted-average base case one-year PD assumption to 4.6%, including coronavirus-related adjustments and considering the updated secured/unsecured loans mix. DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool and updated its PD and recovery assumptions on the outstanding portfolio to 57.3% and 60.0%, respectively, at the AAA (sf) rating level.

CREDIT ENHANCEMENT
As of May 2021, the credit enhancement to the Class A2 Notes was 68.3%, up from 58.5% since May 2020. The credit enhancement on the Class A2 Notes considers the balance of the performing portfolio (excluding delinquencies of more than 90 days) and the cash reserve accounts.

The structure includes 28 nonamortising cash reserve accounts, each funded at closing by the relevant originator through a limited-recourse loan, with a current aggregate balance of EUR 20.7 million.

BNP Paribas Securities Services S.C.A., Milan branch (BNP Milan) acts as transaction bank, Italian paying agent, cash manager, principal paying agent, and agent bank for this transaction while BNP Paribas Securities Services S.C.A., London branch (BNP London) acts as the English transaction bank. On the basis of DBRS Morningstar’s private ratings on both BNP Milan and BNP London, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction, DBRS Morningstar considers the risk arising from the exposure to the transaction bank and the English transaction bank to be consistent with the rating on the Class A2 Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

J.P. Morgan Securities plc (JP Morgan Securities) and JPMorgan Chase Bank, N.A. are the swap counterparty and swap guarantor, respectively. DBRS Morningstar’s private rating on JP Morgan Securities and its public rating on JPMorgan Chase Bank, N.A. are consistent with the First Rating Threshold defined in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

However, as the rating provisions in place are not fully compliant with DBRS Morningstar’s methodology in terms of collateral posting and replacement actions, DBRS Morningstar did not give credit to these contracts in the cash flow analysis.

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

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 SME 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 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, 2.3% and 39.1% of the outstanding portfolio balance represented industries classified in the 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 an 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 31 October 2021, around EUR 84.6 million benefitted from payment holidays.

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.

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

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include investor and servicer reports provided by Deutsche Bank AG and Cassa Centrale Banca - Credito Cooperativo del Nord Est S.p.A. and loan-level 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 not 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 6 April 2021, when DBRS Morningstar upgraded its rating on the Class A2 Notes to AAA (sf) from AA (high) (sf) following the finalisation of the “Legal Criteria for European Structured Finance Transactions” methodology.

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 to the parameters used to determine the rating (the base case):
-- PD Rates Used: Base case PD of 4.6%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rates of 60.0% at the AAA (sf) stress level for the Class A2 Notes, a 10% and 20% decrease in the base case recovery rates. 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% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A2 Notes at AAA (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Class A2 Notes at AAA (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: Helvia Meana, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 10 August 2012; Class A2 Notes: 6 December 2017

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:
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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