DBRS Morningstar Takes Rating Actions on Fucino RMBS S.r.l. Following Transaction Restructuring
RMBSDBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by Fucino RMBS S.r.l. (the Issuer), following a restructuring to the transaction (the Restructuring):
-- Assigned a AA (low) (sf) rating to the newly issued Class A1 Notes
-- Discontinued the AAA (sf) rating of the Class A Notes, following their repayment on 16 June 2022 (the Subsequent Issue Date)
-- Downgraded the rating of the Class B Notes to A (sf) from AA (sf)
The rating on the Class A1 Notes addresses the timely payment of interest and the ultimate payment of principal by the final maturity date in December 2063. The rating of the Class B Notes (together with the Class A1 Notes, the Rated Notes) addresses the ultimate payment of interest and the ultimate payment of principal by the final maturity date in December 2063.
The remaining balance of the Class A Notes prior to their full redemption was EUR 59,503,941.
DBRS Morningstar does not rate the Class J Notes.
The rating actions follow an entire review of the transaction and are based on the following analytical considerations:
-- A Restructuring to the transaction executed on 13 June 2022, including, inter alia, a one-off transfer of an additional portfolio to the Issuer, financed with the issuance of the Class A1 Notes;
-- A re-tranching of the notes compared to the Initial Rating Date
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the March 2022 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the Class A1 and Class B Notes to cover the expected losses at their respective rating levels.
Fucino RMBS S.r.l. is a securitisation of residential mortgage loans granted by Banca del Fucino S.p.A. (Banca del Fucino) to individuals and families residing in Italy. Banca del Fucino services the portfolio, with Centotrenta Servicing S.p.A. acting as the backup servicer. The portfolio shows a notable concentration in central Italy, especially in the regions of Lazio and Abruzzo. The transaction initially closed in April 2019, when the Class A, Class B, and Class J Notes were issued for nominal amounts of EUR 128,915,000; EUR 5,997,000; and EUR 14,990,000, respectively.
THE RESTRUCTURING
The Restrucuring consisted of, but it is not limited to:
-- A one-off transfer of an additional portfolio totaling EUR 52,883,006 as of 30 April 2022. The pool composition is substantially in line with the existing portfolio.
-- The issuance of the Class A1 Notes to finance the purchase of the additional pool and fully redeem the outstanding Class A Notes.
-- A re-tranching of the notes compared to the Initial Rating Date. The Class A1, Class B, and Class J balances post-Restructuring are equal to EUR 118,000,000; EUR 5,000,000; and EUR 12,480,000, respectively.
-- A change in the eligibility criteria to allow the transfer of (i) loans originated by Igea Banca S.p.A. (merged into Banca del Fucino) and (ii) loans originated by other banks and subsequently acquired by Banca del Fucino as a result of subrogation.
-- A change in the interest rate renegotiation limits to 25% from 20% of the aggregate portfolio. The maximum yield reduction has been maintained at 50bps.
-- A change in the periodic payment holiday renegotiation limit to 20% from 10% of the aggregate portfolio.
-- A change in the cumulative payment holiday renegotiation limit to 35% from 20% of the aggregate portfolio.
-- An extension of the notes’ final maturity date to December 2063 from December 2060.
-- An amendment to the swap documents to incorporate the updated structure. The fixed-floating swap documentation is now compliant with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.
PORTFOLIO PERFORMANCE
The portfolio is performing within DBRS Morningstar’s expectations. As of the February 2022 cut-off date, arrears were low, with the 90+ delinquency ratio at 0.1% of the portfolio performing balance, while no defaulted loans were recorded so far. As of the same cut-off date, cumulative repurchases were equal to 8.0% of the initial portfolio, which is within the contractual limit.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the aggregate pool of receivables and has updated its base case PD and LGD assumptions to 7.9% and 18.4%, respectively, compared with 9.4% and 10.9%, respectively, as of the latest annual review of the transaction in February 2022. The lower PD and higher LGD assumptions are the result of the additional portfolio transferred in the context of the Restructuring, and the updated historical data received.
CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio provides credit enhancement to the Rated Notes. As of the Subsequent Issue Date, credit enhancement to the Class A1 and Class B Notes was 12.9% and 9.2%, respectively. The subordination level decreased compared to the latest annual review of the transaction in February 2022, when credit enhancement to the Class A and Class B Notes was 32.1% and 25.2%, respectively.
The updated tranching as a result of the Restructuring was the main driver that prompted the rating actions.
The transaction continues to benefit from a cash reserve, which provides liquidity support and is available to cover senior fees, swap payments, and coupon payments on the Class A1 Notes only. As of the Subsequent Issue Date, the cash reserve was topped up to its new target level of EUR 4,305,000, or 3.5% of the outstanding balance of the Rated Notes, using cash on the investment account. The cash reserve is floored at 1.0% of the Rated Notes balance as of the Subsequent Issue Date.
BNP Paribas Securities Services continues to act as the account bank for the transaction. Based on the private rating of 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.
Three swap transactions are in place: two to hedge the basis risk, and one to hedge the fixed-floating interest rate risk. J.P. Morgan SE acts as the swap counterparty. DBRS Morningstar has only given credit to the fixed-floating swap, as the swap documentation of the basis swaps is not fully compliant with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.
DBRS Morningstar analysed the transaction structure in Intex DealMaker.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social and/or Governance factors that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
Notes:
All figures are in euros unless otherwise noted.
The principal methodologies applicable to the ratings are the “Master European Structured Finance Surveillance Methodology” (19 May 2022), the “European RMBS Insight Methodology” (28 March 2022), and the “European RMBS Insight: Italian Addendum” (10 December 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 methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.
DBRS Morningstar conducted a review of the amended transaction documents, including but not limited to:
-- the Transfer Amendment Agreement;
-- the Servicing Agreement;
-- the Subsequent Warranty and Indemnity Agreement;
-- the Prospectus;
-- the Class A1 Notes Subscription Agreement;
-- the General Amendment Agreement;
-- the Subsequent Subordinated Loan 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-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 these ratings include:
-- Investor reports provided by Centotrenta Servicing S.p.A.,
-- Servicer reports provided by Banca del Fucino
-- Loan-level data provided by Banca del Fucino, directly or indirectly through the transaction’s arranger JP Morgan.
-- Updated historical performance data including:
- Yearly static default data by vintage of origination, spanning from 2002 to 2021
- Yearly static recovery data by vintage of default, spanning from 2002 to 2018
- Yearly Static and dynamic prepayment data spanning from 2002 to 2021
- Dynamic 90-180 and 180+ days delinquency data spanning from Q32009 to Q32021
DBRS Morningstar did not rely upon third-party due diligence to conduct its analysis.
Both at the time of the initial ratings and the time of the Restructuring, 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.
The last rating action on this transaction took place on 18 February 2022, when DBRS Morningstar:
-- upgraded its rating on the Class A Notes to AAA (sf) from AA (low) (sf).
-- upgraded its rating on the Class B Notes to AA (sf) from A (low) (sf).
The lead analyst responsibilities for this transaction have been transferred to Pascale Kallas.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at www.dbrsmorningstar.com.
Sensitivity Analysis: 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 ratings (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 7.9% and 18.4%, 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. Taking the Class A1 Notes as an example, if the LGD increases by 50%, the rating on the Class A1 Notes would be expected to fall to A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A1 Notes would be expected to fall to BBB (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A1 Notes would be expected to fall to BBB (high) (sf).
Class A1 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 (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of BBB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of 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: Pascale Kallas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 15 April 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.
-- European RMBS Insight Methodology (28 March 2022) and European RMBS Insight Model v.5.5.0.2,
https://www.dbrsmorningstar.com/research/394309/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (10 December 2021),
https://www.dbrsmorningstar.com/research/389473/european-rmbs-insight-italian-addendum.
-- Master European Structured Finance Surveillance Methodology (19 May 2022),
https://www.dbrsmorningstar.com/research/397033/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021),
https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021),
https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021),
https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021),
https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021),
https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022),
https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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.
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