DBRS Morningstar Upgrades Rating on Florence SPV S.r.l. (2020) Following Amendment

DBRS Ratings GmbH (DBRS Morningstar) upgraded its rating of the Class A Notes issued by Florence SPV S.r.l. (2020) (the Issuer) to AA (high) (sf) from AA (low) (sf), following a transaction amendment (the Amendment).

The rating addresses the timely payment of interest and the ultimate payment of principal by the final maturity date in October 2042.

The upgrade is based on the following analytical considerations:

-- The Amendment to the transaction consisting of an extension of the revolving period and an increase in the current limit on flexible loans;
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the June 2022 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions for the remaining collateral pool, considering the updated quarterly vintage performance data received in the context of the Amendment;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AA (high) (sf) rating level; and
-- No purchase termination events, breach of concentration limits, or trigger events have occurred to date.

The transaction is a revolving securitisation of unsecured personal loans granted by Findomestic Banca S.p.A. (Findomestic) to individuals residing in Italy. The transaction closed in October 2020 and was structured with a 24-month revolving period that was scheduled to end in October 2022 but has now been extended until October 2024 following the Amendment. During the revolving period, Findomestic may sell new receivables to the Issuer subject to certain conditions, limitations, and purchase termination events. During this period, the purchase of new receivables will be funded either through principal collections or through additional notes subscriptions. The transaction is structured with a principal deficiency ledger mechanism, whereby provisioning occurs when a loan is classified as defaulted. Findomestic services the collateral portfolio, with Banca Finanziaria Internazionale S.p.A. acting as the backup servicer facilitator.

AMENDMENT
The following amendments to the transaction took effect on 12 July 2022:
-- Extension of the revolving period to October 2024 from October 2022 earlier; and
-- Increase in the limit of flexible loans for subsequent portfolios to 85% from 50% in the concentration limits.

PORTFOLIO PERFORMANCE
As of the May 2022 cut-off date, two- to three-month arrears represented 0.3% of the outstanding portfolio balance, up from 0.2% in May 2021. As of the same cut-off date, the 90+ delinquency ratio was 0.3%, up from 0.2% in May 2021. As of May 2022, the gross cumulative default ratio was equal to 1.2% of the aggregate portfolio balance (initial plus subsequent portfolios), with insignificant recoveries realised to date. The number of borrowers in payment holidays was negligible for the purpose of the rating analysis.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated its base case PD and LGD to 8.1% and 77.3%, respectively, from 12.3% and 78.3%, respectively, based on updated historical default and recovery data received from Findomestic. The portfolio assumptions continue to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolio and the cash reserve provide credit enhancement to the Class A Notes. As of the June 2022 payment date, credit enhancement to the Class A Notes was 27.6%, stable since the DBRS Morningstar initial rating, due to the transaction revolving period, which now ends in October 2024.

The transaction benefits from an amortising cash reserve, available to cover principal payments on the Class A Notes. The reserve is currently at its target level of EUR 96.0 million, or 1.6% of the collateral portfolio balance, and it is floored at 0.8% of the initial portfolio balance.

The transaction also features an amortising liquidity reserve, available to cover senior fees and interest payment on the Class A Notes (only if principal collections are not sufficient to cover the interest deficiency). The reserve is currently at its target level of EUR 15.0 million, or 0.25% of the collateral portfolio balance, and it is floored at 0.115% of the initial portfolio balance.

BNP Paribas Securities Services, Milan branch 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 rating assigned to the notes, as described in DBRS Morningstar's "Legal 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/Governance factors that had a significant or relevant impact 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 rating are the “Master European Structured Finance Surveillance Methodology” (19 May 2022) and the “Rating European Consumer and Commercial Asset-Backed Securitisations” (29 October 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 has conducted a review of the transaction’s legal documents provided in the context of the Amendment. A review of any other transaction’s legal documents was not conducted as the 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 payment and investor reports provided by Banca Finanziaria Internazionale S.p.A., and servicer reports, additional information, loan-level data, and the following historical performance data provided by Findomestic:

-- Static quarterly default data from Q1 2012 to Q1 2022;
-- Static quarterly recovery data from Q1 2012 to Q1 2022;
-- Static quarterly prepayment data from Q1 2012 to Q1 2022;
-- Dynamic monthly delinquency data from March 2012 to March 2022; and
-- Dynamic monthly prepayments data from March 2012 to March 2022.

DBRS Morningstar did not rely upon third-party due diligence 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 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 30 September 2021, when DBRS Morningstar confirmed its AA (low) (sf) rating of the Class A Notes.

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.

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 8.1% and 77.3%, 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 AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to 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 (low) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (low) (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 (low) (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: 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: Pascale Kallas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 29 October 2020

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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- 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.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (29 October 2021), https://www.dbrsmorningstar.com/research/387042/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (19 May 2022), https://www.dbrsmorningstar.com/research/397034/rating-european-structured-finance-transactions-methodology.
-- 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.