Press Release

DBRS Morningstar Finalises its Provisional Credit Rating of BBB (low) (sf), Stable Trend, to Veicolo di Sistema S.r.l.

Nonperforming Loans

December 14, 2023

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional rating of BBB (low) (sf) credit rating with a Stable trend to the EUR 70,000,000 Class A Notes to be issued by Veicolo di Sistema S.r.l. (the Issuer).

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in December 2036.

As of the relevant cut-off dates, the Class A Notes were backed by a EUR 611,391,601 portfolio by gross book value (GBV) of San Marino unsecured and secured nonperforming loans (NPLs) granted to San Marino and Italian borrowers and sold to the Issuer by Banca di San Marino S.p.A. (BSM), Cassa di Risparmio della Repubblica di San Marino S.p.A. (CRSM), Banca Agricola Commerciale S.p.A. (BAC), Società di Gestione degli Attivi ex BNS S.p.A. (SGA),739 SG S.p.A. (739), Veicolo Pubblico Di Segregazione Fondi Pensione S.p.A. (VPSF, and together with BSM, CRSM, BAC, SGA, and 739, the Sellers). S3 – Special Servicer Sammarinese S.r.l. (S3 or the Special Servicer) services the receivables while Istituto per la Gestione e il Recupero dei Crediti S.p.A. acts as the master servicer (IGRC or the Master Servicer) for the transaction. Guber Banca S.p.A. and Banca Finanziaria Internazionale S.p.A. act, respectively, as Special Servicer Adviser and Master Servicer Adviser.

In order to facilitate the onboarding of the receivables, the Issuer, S3, IGRC, and the Sellers have entered into an agreement (the Interim Servicing Agreement) pursuant to which each Seller has undertaken to manage the relevant receivables assigned to the Issuer until February 2024 (extendable until March 2024 with the consent of all parties to the Interim Servicing Agreement).

The securitised portfolio, based on DBRS Morningstar assessment of the final dataset provided on 8 December 2023, is composed of (1) unsecured exposures, representing approximately 53.5% of the GBV, (2) secured loans, representing 33.5% of the GBV, approximately 82.9% by GBV of which benefits from a first-ranking mortgage, and (3) leases backed by real estate (RE) assets, representing the remaining 13.0% of the GBV. At the relevant cut-off dates, the portfolio mainly comprised corporate borrowers at 76.5% by GBV, and the properties securing the exposures in the portfolio mainly comprised residential assets at 33.9% by updated RE value. The secured collateral was mainly concentrated in the Republic of San Marino at 51.5% by updated RE value, with Emilia Romagna being the most represented Italian region (16.7% by updated RE value). The transaction benefits from approximately EUR 7.26 million net collections recovered between the relevant cut-off dates and November 2023, contributed by the Sellers through a portion the Liquidity Reserve.

The Issuer benefits from a guarantee from the Republic of San Marino for the prompt and complete payment of all current and future liabilities of the Issuer with respect to obligations arising under the Class A Notes pursuant to article 21 of the San Marino Securitisation Law and any relevant applicable regulations (the RSM Guarantee).

In accordance with Law no. 157 of 31 August 2021 (the RSM Securitisation Law), the transaction benefits from a pledge governed by the law of the Republic of San Marino granted to the Issuer by each of the Sellers for an amount equal to EUR 13.76 million, which is 20% of the cash proceeds upon the sale of the Class A Notes (the Pledged Amount). The Pledged Amount will constitute a cash reserve to be held in escrow with the Central Bank of San Marino (SM Account Bank), and the amount standing thereon will be released and used in case of occurrence of a Class A Notes Shortfall Event, being a shortfall in the funds available to pay amounts due as principal and interest on the Class A Notes, and the senior costs of the transaction in certain circumstances. On the first interest payment date (IPD), EUR 8.16 million of the Pledged Amount will be released and form part of the available funds to amortise the Class A Notes. The target amount of the cash reserve established by the Pledged Amount on each IPD is sized at 8.0% of the principal outstanding on the Class A Notes.

In case the Pledged Amount is not sufficient to pay the Issuer’s liabilities with respect to the payments of principal and interest due under the Class A Notes, the Issuer is allowed to enforce the RSM Guarantee. The RSM Guarantee was approved by the Republic of San Marino State Congress on 28 November 2023 and is unconditional, irrevocable, and on first demand and for an amount not exceeding EUR 70.0 million, plus any due and unpaid interest amount above this cap. The Issuer will be required to pay an annual premium equal to 85 basis points calculated on the outstanding principal of the Class A Notes less the Pledged Amount.

The transaction benefits from a Liquidity Reserve Account equal to EUR 10.0 million, which will be financed through three Subordinated Loans disbursed by BAC, CRSM, and BSM (the Subordinated Loans) and three deferred purchase prices of the portfolio to be paid by the Issuer to VPSFP, 739, and SGA (the Deferred Purchase Price). The reserve will be used at closing to pay certain upfront costs and fees, including the cap premium, the funding of the Recovery Expenses Cash Reserve (EUR 120,000), and the Retention Amount (EUR 80,000). On the first IPD, at least EUR 4.20 million will be distributed in accordance with the priority of payments. The target amount of the liquidity reserve on each IPD is sized at 3.7% of the principal outstanding on the Class A Notes.

The RSM Securitisation Law allows the Issuer to purchase real estate assets and movable assets already purchased as a consequence of debt collection activities or in the context of business combination transactions, similar to a real estate owned company (ReoCo) structure or an Italian lease company (LeaseCo) but different from an Italian SPV since these are allowed only to purchase receivables. ReoCos are real estate companies that are usually set up to maximise recoveries by (1) participating at auction to increase competitive tension between the parties interested in purchasing the real estate properties; and (2) acquiring and actively managing the assets to enhance their value. LeaseCos are real estate companies that allow sellers to dispose of their assets connected to financial lease agreements, together with the relevant receivable. The Issuer will also purchase from the Sellers receivables that arise from financial lease agreements, together with the relevant leased assets.

CREDIT RATING RATIONALE
DBRS Morningstar based its credit rating on a review of the following analytical considerations:
-- The financial guarantee covering the rated liabilities (i.e. Class A Notes) in accordance with the “Rating European Structured Finance Transactions Methodology, Appendix 2 – Obligations Backed by Insurance Policy (Financial Guarantee)”. The credit rating of the guarantor, the Republic of San Marino, is BBB (low) (Long-Term Foreign and Local Currency Rating – Issuer Rating) with a Stable trend as of the date of this press release.
-- DBRS Morningstar analysed the assets included in the portfolio through the Rating European Nonperforming Loans Securitisations methodology.
-- The transaction’s capital structure, including the form and sufficiency of available credit enhancement.
-- The quality of the loans and properties in the portfolio and the ability of the Special Servicer to perform collection and resolution activities.
-- DBRS Morningstar determined that the structure of the transaction is linked to the credit risk of the Republic of San Marino. However, DBRS Morningstar recognises that there could be scenarios where, even upon default of the Republic of San Marino, (1) the cash flow generated by the assets included in the portfolio would be sufficient to meet the timely payment of interest and the ultimate repayment of principal due under the Class A Notes and (2) the Central Bank of San Marino would continue to honour its payment obligations as SM Account Bank (as required by the RSM Securitisation Law), allowing the Issuer to meet its obligations under the Class A Notes. Nevertheless, DBRS Morningstar is of the opinion that the likelihood of such scenarios is insufficient to warrant a credit rating on the Class A Notes above BBB (low), current credit rating of the Republic of San Marino.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Notes according to the terms of the transaction documents.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal and tax opinions to address, amongst others, the true sale of the assets to the Issuer.

DBRS Morningstar’s credit rating on the EUR 70,000,000 Class A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Amounts and the Initial Principal Amount Outstanding.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

The impact of any credit rating actions on the Republic of San Marino on this credit rating are assessed in accordance with the “Rating European Structured Finance Transactions Methodology, Appendix 2 – Obligations Backed by Insurance Policy (Financial Guarantee)”. ESG factors that have a significant or relevant effect on the credit analysis of the Republic of San Marino are discussed separately at https://www.dbrsmorningstar.com/research/424837/dbrs-morningstar-assigns-bbb-low-credit-ratings-to-the-republic-of-san-marino.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is the Rating European Structured Finance Transactions Methodology, Appendix 2 – Obligations Backed by Insurance Policy (Financial Guarantee) (11 December 2023), https://www.dbrsmorningstar.com/research/425149/rating-european-structured-finance-transactions-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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/421590.

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.

The sources of data and information used for the finalisation of this provisional credit rating include secured historical performance data (repossession data for secured assets sold between 2001 and 2023) and unsecured historical performance data (historical yearly recovery curves from static pool of Italian and San Marino unsecured loans over a period of 36 years) provided by Guber Banca S.p.A. on 12 June 2023, as well as a business plan and loan data shared on 27 November 2023 by the Special Servicer Adviser and the Sellers, respectively.

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 credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

This credit rating concerns a newly issued financial instrument.

The last credit rating action on this transaction took place on 11 December 2023, when DBRS Morningstar assigned a provisional credit rating to the Class A Notes.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

Sensitivity Analysis: To assess the impact of changing the pool transaction parameters on the credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the Base Case):

-- Recovery Rates Used: Cumulative Base Case recovery amount of approximately EUR 92.4 million at the BBB (low) (sf) stress level, a 5% and 10% decrease in the base-case recovery rate. *
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a confirmation of the Class A Notes at BBB (low) (sf).
DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a confirmation of the Class A Notes to BBB (low) (sf).
*The credit rating remains at BBB (low) (sf), given the presence of the RSM Guarantee and the counterparty risk arising from the Central Bank of San Marino acting as SM Account Bank of the transaction.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Lorenzo Simonte, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 14 December 2023

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The credit 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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