Press Release

DBRS Morningstar Assigns Rating to Giada Sec. S.r.l. (2022)

Structured Credit

December 06, 2022

DBRS Ratings GmbH (DBRS Morningstar) assigned an A (sf) rating to the EUR 10,250,000,000 Class A Asset Backed Floating Rate Notes due October 2063 (the Class A Notes) issued by Giada Sec. S.r.l. (2022) (Giada 2022 or the Issuer).

The rating addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in October 2063. The Issuer also issued EUR 4,939,800,000 Class B Asset Backed Fixed Rate and Additional Return Notes due October 2063 (together with the Class A Notes, the notes), which DBRS Morningstar did not rate.

Giada 2022 is a revolving cash flow securitisation collateralised by a portfolio of performing unsecured and mortgage-backed loans granted to Italian small and medium-size enterprises (SMEs), entrepreneurs, artisans, and producer families by Intesa Sanpaolo SpA (ISP or the originator; 91.3% of initial portfolio), UBI Banca S.p.A. (8.2% of initial portfolio), and other regional banks fully owned by the ISP group (0.5% of initial portfolio).

As of the initial valuation date of 17 October 2022, the portfolio consisted of 191,399 loans extended to 174,738 borrowers, with an aggregate principal outstanding balance equal to EUR 15.17 billion, of which 0.5% was up to 150 days in arrears. The unsecured and mortgage-backed loans represent 97.1% and 2.9% of the outstanding principal balance, respectively. Around 84.5% of the initial portfolio is assisted by the Fondo Centrale di Garanzia (FCG) guarantee, a state guarantee that covers on average 87.3% of the guaranteed loans’ outstanding balance.

The transaction is structured with a three-year revolving period, scheduled to end in January 2026 (included), during which the originator may sell additional receivables to the Issuer, subject to certain conditions and limitations. The revolving period will terminate early if certain events occur, including, but not limited to, the cumulative gross default rate exceeding 8.5%; the cash reserve or the additional cash reserve (if any) failing to reach their target levels; the failure to transfer further portfolios for three consecutive payment dates; and/or the originator’s insolvency. During the revolving period, the purchase of new receivables will be funded through principal collections.

The transaction features a cash reserve, which will be available to cover expenses, senior fees, and interest payments on the Class A Notes. The cash reserve was funded at transaction closing via a subordinated loan provided by ISP and its target amount is equal to 1.9% of the principal outstanding balance of the Class A Notes (without floor). Released amounts will be used to pay down the subordinated loan. An additional cash reserve will be funded by ISP through a subordinated loan upon a downgrade of ISP below BB (high), for a target amount equal to EUR 900 million, and would act as a partial mitigant to set-off risk for the Issuer.

The Class A Notes benefit from a total credit enhancement equal to 32.4%, which is solely provided by the asset portfolio’s outstanding principal balance. DBRS Morningstar does not deem the cash reserve to provide credit enhancement.

The initial portfolio is well diversified across Italy, with the northern, central and southern regions representing 57.1%, 22.4%, and 20.5%, respectively. The three largest regional exposures are Lombardy (25.7%), Veneto (10.7%), and Tuscany (9.4%). The initial portfolio shows a relatively good industry diversification, with the top three sector exposures (as per DBRS Morningstar’s industry classifications) of building & development, business equipment & services, and retailers representing 19.1%, 9.9%, and 6.6% of the pool balance, respectively. The initial portfolio is very granular with low borrower concentration. The top one, five, and 50 borrowers account for 0.1%, 0.3%, and 2.2% of the outstanding portfolio balance, respectively. Purchase conditions are in place to control for geographic, industry, and borrower concentrations during the revolving period.

DBRS Morningstar based its analysis on a stressed portfolio created considering the scheduled amortisation plan of the initial portfolio and the purchase conditions applying on further portfolios.

The initial portfolio consists of unsecured and mortgage-backed loans and has a weighted average life (WAL) of 2.9 years. The weighted-average (WA) probability of default (PD) of the initial portfolio is 2.3% (based on ISP’s internal rating system).
The purchase conditions during the revolving period limit the maximum WA residual term of the additional portfolios to 15 years for secured loans and 6.5 years for unsecured loans, and the maximum WA internal PD to 3.2%.

The stressed portfolio was built considering the characteristics of the initial portfolio on the portion assumed to be outstanding after the end of the revolving period, and the characteristics of the replaced portfolio built in line with the purchase conditions. The purchase conditions limit the portion of mortgage-backed loans in the portfolio to 8.0%. DBRS Morningstar based its analysis on the maximum portion of mortgage loans in the portfolio, as it carries the highest loss expectations because of the higher associated PD.

Pursuant to the purchase conditions, the minimum amount of loans purchased during the revolving period assisted by the FCG guarantee is 50.0% until 31 December 2023 and 20.0% thereafter. DBRS Morningstar adjusted the unsecured recovery rates to account for the benefit of the guarantee. In its credit analysis, DBRS Morningstar did not give full credit to the guarantee for rating scenarios above BBB (high) (sf), in line with the current long-term issuer rating on the Italian sovereign. Moreover, DBRS Morningstar assumed that in all rating scenarios a portion of the guarantee would not be honored to account for possible rescissions of the guarantee due to noncompliance with the terms.

The transaction is substantially exposed to set-off risk, which represents 20.5% of the initial portfolio, if all borrowers opt to claim the first EUR 100,000 covered by the deposit guarantee scheme. The additional cash reserve to be funded by ISP upon a downgrade event, partially mitigates this risk. DBRS Morningstar assumed a set-off loss of EUR 704.5 million in its analysis, which was deducted from the portfolio balance.

ISP covers several key roles in the transaction including servicer, collection account bank, and Issuer account bank. DBRS Morningstar deems ISP to be a dominant counterparty in this transaction. Based on the account bank’s rating and the replacement provisions included in the transaction documents, DBRS Morningstar considers the counterparty risk to be consistent with the rating assigned to the Class A Notes, in accordance with its “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar determined its ratings based on the principal methodology and the following analytical considerations:
-- DBRS Morningstar determined the PD for the portfolio using the historical performance information supplied. DBRS Morningstar assumed annualised PDs of 2.1% and 4.4% for unsecured and mortgage-backed loans, respectively, for the portfolio assumed to be outstanding after the end of the revolving period, and an annualised PD of 3.2% for the replenished portfolio.
-- The WAL of the portfolio was 3.2 years.
-- DBRS Morningstar used the PDs and WAL as inputs in its SME Diversity Model to generate the hurdle rate for the assigned rating.
-- DBRS Morningstar determined the recovery rate by giving partial credit to the FCG guarantee. The recovery rate is 33.0% at the A (sf) rating level.
-- DBRS Morningstar determined the breakeven rates for the interest rate stresses and default timings using its cash flow tool.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Social (S) Factors
DBRS Morningstar considered the presence of loans backed by the FCG guarantee to be a significant social factor (Social Impact of Product & Services) as outlined within the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings”. DBRS Morningstar assumed reduced loss severity for the loans that are backed by the FCG guarantee. This is credit positive given the reduced loss expectations for FCG-guaranteed loans.

There were no Environmental/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 (17 May 2022).

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

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” (10 June 2022).

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.

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.

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/401817/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 historical performance data provided by the originator and arranger, Intesa Sanpaolo S.p.A.

DBRS Morningstar received the following data information, split by mortgage/unsecured loans and type of borrower:
-- Static quarterly default data from Q4 2012 to Q2 2022, by loan amount and number of accounts;
-- Static quarterly prepayment data from Q4 2012 to Q2 2022, by loan amount and number of accounts;
-- Dynamic quarterly delinquency data from Q3 2012 to Q2 2022, by loan amount and number of accounts;
-- Static yearly recovery data from 2000 to 2021, by loan amount and number of accounts; and
-- Rating migration matrixes of ISP’s internal rating system for the years 2018, 2019, and 2020.

In addition, DBRS Morningstar received loan-level information, contractual amortisation profile, data on set-off exposure, and information on claims to the FCG.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on 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 rating (the base case):

-- PD Rates Used: Base case PD of 3.0%, a 10% and 20% increase on the base case PD.
-- Recovery rates Used: Base case recovery rate of 33.0% at the A (sf) stress level, a 10% and 20% decrease in the base case recovery rate. 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 on the Class A Notes at A (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would also lead to a confirmation on the Class A Notes at A (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 rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Daniele Canestrari, Assistant Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 6 December 2022

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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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