DBRS Assigns Final Ratings to Quadrivio SME 2014 S.r.l.

DBRS Ratings Limited (“DBRS”) has today assigned final ratings to the Senior Notes issued by Quadrivio SME 2014 S.r.l. (the “Issuer”), as follows:

• EUR 80,000,000 Class A1-2014 Asset-Backed Floating Rate Notes due October 2050: AAA (sf)
• EUR 200,000,000 Class A2A-2014 Asset-Backed Floating Rate Notes due October 2050: AAA (sf)
• EUR 110,000,000 Class A2B-2014 Asset-Backed Floating Rate Notes due October 2050: AAA (sf)

The Issuer is a limited liability company incorporated under the laws of Italy. The transaction is a cash flow securitisation collateralised by a portfolio of bank loans to Italian small and medium-sized enterprises (“SMEs”), entrepreneurs and artisans. The loans were originated by three banks that are part of the Creval Group: Credito Valtellinese S.C. (“Creval”), Cassa di Risparmio di Fano S.p.A. (“Carifano”) and Credito Siciliano S.p.A. (“Credito Siciliano”), collectively referred to as the “Originators”.

The Class A1, Class A2A and Class A2B Notes (collectively, the “Senior Notes”) are pro rata and pari passu in interest, while the Class A1 Notes will rank senior to the Class A2A and Class A2B Notes with respect to principal payments. The Class A2A and A2B Notes are pro rata and pari passu in principal payments. The ratings on the Senior Notes address the timely payment of interest and the ultimate payment of principal payable on or before the Maturity Date in October 2050. DBRS does not rate the Class B Notes (the “Junior Notes”).

The economic effect of the transfer of the portfolio from the Originators to the Issuer took place on 23 November 2013 (the “Effective Date”) with an aggregate par balance of EUR 709.38 million consisting of 2,536 loans to 1,938 borrower groups.

Between 23 November 2013 and 15 January 2014, the Issuer has collected EUR 18.89 million of principal proceeds which the Issuer will use to repay the Class A1 Notes on the first payment date. As of 15 January 2014, the portfolio consisted of 2,508 loans extended to 1,926 borrower groups with a par balance of EUR 690.50 million. As of this date the portfolio contained 22 loans in arrears by more than 30 days with an aggregated balance of EUR 3.27 million (0.47% of the portfolio balance) and 137 loans in arrears by less than 30 days with an aggregated balance of EUR 40.20 million (5.82% of the portfolio balance).

The ratings of the Senior Notes are based upon DBRS’s review of the following items:
• The transaction structure, the form and sufficiency of available credit enhancement, the portfolio characteristics:
-- The transaction is diversified by borrower groups. The exposure to the largest one, ten and twenty borrower groups represent 1.51%, 9.52%, and 15.67%, respectively, based on the portfolio outstanding balance as of 15 January 2014. The portfolio also has a diversified industry concentration as per DBRS industry codes, with the top three industries being “Building & Development” (22.47%), “Farming/agriculture” (20.68%) and “Business equipment & services” (6.63%). The top three regions are Lombardy (50.33%), Sicily (20.32%) and Marche (9.52%), which reflect the distribution of the Creval Group’s branches across Italy. Although somewhat concentrated in Lombardy and Sicily, the only province accounting for more than 10% of the portfolio balance is Milan (15.48%).
-- 18.07% of the portfolio balance as of 15 January 2014 comprises loans granted to develop renewable energy projects which benefit from subsidies that secure the rate of return for delivered electric output over a 20-year period (the “feed-in tariff”). Included in these loans, 3.85% of the portfolio balance has been granted to companies whose sole business function is producing and selling electricity. DBRS applied conservative loss assumptions with regard to these loans to account for the potential linkage existing between the subsidies and the sovereign credit quality.
-- Each of the Originators will act as the Sub-Servicers for their respective portfolios. Additionally, Creval will act as Servicer, and Securitisation Services S.p.A. will be a Back-up Servicer Facilitator. DBRS views as a weakness the appointment of a generic Back-up Servicer only upon downgrade of the Servicer below the equivalent of a DBRS rating of BB (low) by at least two rating agencies. To account for the lack of adequate mitigants to commingling risk, a loss of EUR 9.3 million has been factored into the rating analysis.
-- The transaction does not have mitigants dedicated to set-off risk. This was factored into DBRS’s analysis of the transaction.
-- The credit enhancement for the Senior Notes is 46.95% which DBRS considers to be sufficient to support the AAA (sf) ratings.
• The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting, and servicing practices.
• The Cash Reserve (“CR”) which will be available to cover any shortfalls in the senior fees and interest on the Senior Notes. The CR is amortising and will be maintained at 3.5% of the Senior Notes, with an initial balance of EUR 13.65 million and a minimum of EUR 5.46 million. Proceeds from the amortisation of the CR will be used to repay the Senior Notes.
• An assessment of the operational capabilities of key transaction participants.
• The ability of the transaction to withstand stressed cash flow assumptions and repay Noteholders according to the approved terms. Interest and principal payments on the Senior Notes will be made quarterly.
• The soundness of the legal structure and the presence of legal opinions which address the true sale of the assets to the trust and the non-consolidation of the Issuer, as well as consistency with the DBRS “Legal Criteria for European Structured Finance Transactions”.

DBRS determined the ratings of the Class A1, Class A2A and Class A2B Notes as follows, as per the principal methodology specified below:
• The annualised probability of default (“PD”) for the originators, determined using the arrears data supplied, was computed to be 3.38%.
• The assumed weighted average life (“WAL”) of the Portfolio was 6.18 years.
• The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the target rating.
• The recovery rate was determined by considering the market value declines (“MVDs”) for Italy, the security level, and the type of collateral. Recovery rates of 59.94% and 13.34% were used for the secured and unsecured loans, respectively at the target rating level.
• The break even rates for the interest rate stresses and default timings were determined using the DBRS Cash Flow Model.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable is “Rating CLOs Backed by Loans to European Small and Medium Sized Enterprises (SMEs)”. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

This can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisation in the EURO Area” at:
http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include the parties involved in the rating, including but not limited to the Originators, the Issuer and the Arrangers, BNP Paribas S.A. and Finanziaria Internazionale Securitisation Services S.p.A.

The vintage performance data provided did not match the definition that DBRS bases its analysis on. The historical performance data was based on the “sofferenza” definition of default, which is different to the standard of 90 days used by DBRS. However, DBRS used additional dynamic arrears data provided the Originators to determine a conservative average annual default rate. DBRS considers the overall information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

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

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

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
• Probability of Default Rates Used: Base Case PD of 3.38%, a 10% and 20% increase on the base case PD.
• Recovery Rates Used: Base Case Recovery Rates, corresponding to a recovery rate of 36.90% at the AAA (sf) stress level, a 10% and 20% decrease in the Base Case Recovery Rates.

DBRS concluded that changing the Base Case PD and Recovery Rates as follows would lead to:
• An increase in the PD by 20% would cause a confirmation of the Class A1 Notes at AAA (sf) and a downgrade of the Class A2A and Class A2B Notes to AA (high) (sf).
• A decrease in the recovery rate schedule by 20% would cause a confirmation of the Class A1 Notes at AAA (sf) and a downgrade of the Class A2A and Class A2B Notes to AA (high) (sf).
• An increase in the PD by 10% and decrease in the recovery rate schedule by 10% together would cause a confirmation of the Class A1 Notes at AAA (sf) and a downgrade of the Class A2A and Class A2B Notes to AA (high) (sf).

It should be noted that the interest rates and other parameters that would normally vary with rating level, including the recovery rates, were allowed to change as per the DBRS methodologies and criteria.

For further information on DBRS’s historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see:
http://cerep.esma.europa.eu/cerepweb/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Marcello Bonassoli
Initial Rating Date: 6 February 2014
Initial Rating Committee Chair: Simon Ross, SVP European Structured Credit

Last Rating Date: 6 February 2014

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

The rating methodologies and criteria used in the analysis of this transaction can be found at:
http://www.dbrs.com/about/methodologies

“Rating CLOs Backed by Loans to European Small and Medium Sized Enterprises (SMEs)”
“Rating Methodology for CLOs and CDOs of Large Corporate Credit”
“Legal Criteria for European Structured Finance Transactions”
“Unified Interest Rate Model for U.S. and European Structured Credit”
“Cash Flow Assumptions for Corporate Credit Securitizations”
“Operational Risk Assessment for European Structured Finance Servicers”
“Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”