Press Release

DBRS Morningstar Confirms Rating on Impresa TWO S.r.l. Following Amendment

Structured Credit

December 02, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating of A (low) (sf) on the Class A Notes issued by Impresa TWO S.r.l. (the Issuer or the transaction) following an amendment of the transaction (the Amendment). The effective date of the amendment is 2 December 2021.

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date, which has been extended by 24 months to October 2063.

The Issuer is a securitisation collateralised by a portfolio of mortgage and nonmortgage loans granted by Unicredit S.p.A. (Unicredit) to Italian small and medium-size enterprises (SME), entrepreneurs, artisans, and producer families. The transaction closed in November 2019 with an initial portfolio balance of EUR 11.1 billion and included an initial 24-month revolving period.

The Amendment extends the revolving period of the transaction, which expired with the October 2021 payment date, by a further 24 months until the October 2023 payment date (inclusive). Additionally, the Amendment facilitates the continuous inclusion of lower interest rate loans supported by the government-backed Fondo Centrale di Garanzia (FCG), reflecting the changed market conditions in the context of the ongoing impacts of the Coronavirus Disease (COVID-19) pandemic.

DBRS Morningstar discusses in more detail the mechanism and impact of FCG-backed loans in the following commentary: https://www.dbrsmorningstar.com/research/384783/italian-central-guarantee-fund-for-smes-a-socially-relevant-public-guarantee-with-credit-positive-implications.

Under the terms of the Amendment, the following purchase conditions, applicable on the aggregate portfolio during the revolving period, have been modified:
-- Weighted-average minimum interest rate on fixed-rate loans of 1.3% (decreased from 1.5% previously) and weighted-average minimum margin for floating-rate loans of 1.8% (increased from 1.5% previously);
-- Maximum level of fixed-rate loans increased to 70% from 50%;
-- Maximum portfolio weighted-average life increased to 3.0 years from 2.9 years;
-- Minimum level of loans backed by FCG increased to 22% from 10%;
-- Minimum weighted-average guarantee coverage for FCG loans of 60%;
-- Minimum amount of loans secured by first-ranking mortgages of 14% at the October 2022 payment date and 12% at the October 2023 payment date;
-- Maximum single borrower, top ten, and top 200 borrowers concentration limits of 0.9%, 8.0%, and 30.0%, respectively (decreased from 1.1%, 10.0%, and 40.0%, respectively); and
-- Minimum amount of loans with a balance greater than EUR 10.0 million of 8.0% (decreased from 10.0%).

Additionally, the thresholds for the cumulative default trigger, the breach of which will result in the termination of the revolving period, have been modified as follows:
-- 1.5% until the April 2022 payment date;
-- 2.7% until the October 2022 payment date (decreased from 3.0%);
-- 3.0% until the April 2023 payment date (decreased from 3.7%);
-- 3.5% until the October 2023 payment date (decreased from 4.0%).

Lastly, the cap on the interest payable on the Class A Notes has been updated as follows:
-- 1.0% until the October 2023 payment date (inclusive);
-- 1.5% until the October 2024 payment date (inclusive);
-- 2.5% after the October 2024 payment date.

This is the third transaction amendment that has been executed since the initial rating in November 2019, following previous amendments in May 2020 and December 2020. For more information, please see the press releases at the Issuer: https://www.dbrsmorningstar.com/issuers/24269/impresa-two-srl.

As of the October 2021 payment date, the gross cumulative default ratio was 0.3% of the aggregate initial portfolios balance, while the 90+ delinquency ratio stood at 0.1% of the outstanding portfolio balance.

Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the Class A Notes. As of the October 2021 payment date, credit enhancement to the Class A Notes has remained at 30.0% since the initial rating date, due to the inclusion of a revolving period in the transaction.

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 SME transactions. The rating is 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 benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolio. As of 31 August 2021, loans that were granted payment holidays amounted to 9.9% of the outstanding balance.

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

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 framework – “DBRS Morningstar’s Approach to Environmental, Social and Governance Risk Factors in Credit Ratings”. DBRS Morningstar assumed reduced loss severity for the loans which are backed by FCG Guarantee. This is credit positive and impacts 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 the “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 principal methodology.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on the replenishment criteria set forth in the transaction legal documents.

DBRS Morningstar reviewed the legal documents provided in the context of the aforementioned amendment, executed on 2 December 2021. A review of any other 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 Unicredit 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 purpose 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 11 November 2020, when DBRS Morningstar confirmed its rating of A (low) (sf) on the Class A Notes.

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: One year base case PD of 4.2%; a 10% and 20% increase on the base case PD.
-- Recovery rates used: Base case recovery rate of 25.0% at the A (low) (sf) rating level; a 10% and 20% decrease in the base case recovery rate.

DBRS Morningstar concludes that a hypothetical increase of base case PD by 20% or a hypothetical decrease of the base case 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 base case PD by 10% and a decrease in the base case Recovery Rate by 10%, ceteris paribus, would likewise 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: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 11 November 2019

DBRS Ratings GmbH
Neue Mainzer Straße 75
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.

Download This Press Release