DBRS Assigns Ratings to Siena PMI 2016 S.r.l.

DBRS Ratings Limited (DBRS) has today assigned ratings to the notes issued by Siena PMI 2016 S.r.l. (the Issuer) as follows:

-- EUR 470,000,000 Class A1 Asset-Backed Floating Rate Notes due 2052 at AAA (sf)
-- EUR 400,000,000 Class A2 Asset-Backed Floating Rate Notes due 2052 at AA (high) (sf)
-- EUR 150,000,000 Class B Asset-Backed Floating Rate Notes due 2052 at A (high) (sf)
-- EUR 313,000,000 Class C Asset-Backed Floating Rate Notes due 2052 B (low) (sf)

The Issuer has also issued EUR 406,300,000 Junior Asset-Backed Variable Return Notes due 2052, which have not been rated by DBRS.

Siena PMI 2016 S.r.l. is a cash flow securitisation collateralised by a portfolio of performing mortgage and non-mortgage loans to Italian small- and medium-sized enterprises (SME), entrepreneurs, artisans and producer families. The loans were mainly granted by Banca Monte dei Paschi di Siena S.p.A. (BMPS or the Originator) but also by Banca Antonveneta, Banca Agricola Mantovana and Banca Toscana before being merged into BMPS.

The transaction includes a 15-month revolving period during which the Originator may sell new receivables (Subsequent Portfolios) to the Issuer subject to certain conditions and limitations. The revolving period will end prematurely after the occurrence of certain events, including the downgrade of BMPS’s senior long-term debt below CCC, the cumulative gross default rate exceeding certain thresholds, the inability to fully replenish the Cash Reserve (CR) and the insolvency of the Originator. The purchase of new receivables will be funded through principal collections only (excluding recoveries), which means that the notes could potentially amortise before the end of the revolving period with the available excess spread, should the portfolio start experiencing default or serious delinquencies.

In a pre-enforcement scenario, the Class A1 and Class A2 Notes (Senior Notes) are pro rata and pari passu with respect to interest payments, while the Class A1 Notes rank senior to Class A2 Notes with respect to principal payments. The structure allows for interest on the Class B and Class C Notes to be paid before the principal of the Senior Notes, but it incorporates a trigger based on the performance of the portfolio to defer these interest payments after the principal payments of the Senior Notes. In a post-enforcement scenario, the Class A1 and Class A2 Notes are pari passu and pro rata with respect to both principal and interest payments. The Class A1, Class A2, Class B and Class C Notes are referred to as the Rated Notes.

The ratings on the Class A1 and Class A2 Notes address the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date (October 2052), while the ratings on the Class B and Class C Notes address the ultimate payment of interest and ultimate payment of principal on or before the Final Maturity Date.

The DBRS analysis relies on certain amendments to the transaction documents that the Originator has confirmed will be finalised before the first payment date. Such amendments are expected to clarify that (1) the Issuer will not have to pay the purchase price for Subsequent Portfolios in case the set-off reserve is not funded at the target level; (2) in the Priority of Payments, no more than EUR 40.00 million can be set aside in the Issuer’s accounts without being used to buy Subsequent Portfolios during the revolving period; and (3) BMPS has a contractual obligation to provide DBRS with loan-by-loan set-off data on a quarterly basis.

The economic effect of the transfer of the portfolio from the Originator to the Issuer took place on 23 September 2016 (the Valuation Date). As of the Valuation Date, the portfolio consisted of 17,740 loans extended to 16,482 borrowers, with an aggregate par balance of EUR 1,739.33 million. The portfolio did not contain any loans in arrears.

The ratings of the Rated Notes are based upon DBRS’s review of the following items:

(1) The portfolio characteristics:

-- The Portfolio Concentration Limits and Eligibility Criteria for Subsequent Portfolios, based on which DBRS has created a worst-case portfolio. DBRS views as negative the lack of limits on the mortgage portion of the portfolio and on the weighted-average coupon of fixed-rate loans. On the other hand, limits on the maximum amount of new receivables that can be bought during the revolving period (EUR 800.00 million) and on the industry and borrower concentrations are viewed positively by DBRS.

-- The majority of the portfolio will consist of non-mortgage loans (74.8% initially), which have a short weighted-average life (WAL; 3.64 years) but also carry low recovery expectations.

-- As per DBRS’s industry classification, the initial portfolio exhibits concentration in Building & Development, which represents 25.53% of the portfolio. However, such concentration is lower than the average of the Italian banking system.

-- The portfolio is very granular, with no borrowers accounting for more than 0.5% and the top ten borrowers accounting for 3.8%.

(2) The deferral trigger on Class B and Class C Notes interest (cumulative default rate above 30.0% and 22.5%, respectively), which limits the leakage of excess spread available to redeem the Senior Notes. The deal is structured with an implicit principal deficiency ledger mechanism whereby provisioning starts when a loan is in arrears by 120/180 days or more (depending on the payment frequency) and full provisioning only occurs when loans are classified as defaulted. Interest and principal payments on the Notes will be made quarterly.

(3) The exposure to interest rate risk. DBRS factored in an adjustment to account for basis and repricing risk.

(4) The CR, which is amortising and maintained at 2% of the balance of the Class A1, Class A2 and Class B Notes (initial balance equal to EUR 21.50 million) without a floor. The CR is available to cover shortfalls of senior fees and interests on the Class A1, Class A2 and Class B Notes as well as principal shortfalls at the Final Maturity Date.

(5) DBRS considers that the servicing and back-up servicing arrangements do not provide sufficient comfort to mitigate commingling risk. As such, DBRS has modelled a loss in its cash flow model to account for commingling risk.

(6) The initial exposure to set-off risk (EUR 137.52 as per DBRS calculation) is partially covered with a set-off reserve, which has an initial balance of EUR 24.00 million and has been funded with a subordinated loan granted by BMPS. During the revolving period only, an increase of the set-off exposure up to EUR 39.87 million will have to be covered by additional drawings under the subordinated loan that will be deposited in the set-off reserve. Any reduction of the set-off exposure will cause a reduction of the set-off reserve, which will form part of the Issuer Available Funds (IAF). The entire balance of the set-off reserve will be part of the IAF upon BMPS’s insolvency.

(7) Credit enhancement for the Class A1, Class A2, Class B and Class C Notes is 74.21%, 46.58%, 40.49% and 21.34%, respectively.

(8) The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting and servicing practices.

(9) The soundness of the legal structure and the presence of legal opinions that address the true sale of the assets to the Issuer as well as consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS determined the ratings of the Rated Notes as follows, as per the principal methodology specified below:
-- The annualised weighted-average probability of default (PD) for the securitised portfolio was computed to be 4.64%.
-- The assumed WAL of the portfolio was 4.34 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 for Italy, the security level and the type of collateral. Recovery rates of 29.71% and 13.50% were used for the secured and unsecured loans, respectively, at the AAA (sf) rating level; 34.35% and 15.75% at the AA (high) (sf) rating level; 38.93% and 16.25% at the A (high) (sf) rating level; and 53.23% and 21.50% at the B (low) (sf) 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 SMEs.

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

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

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

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

The sources of information used for this rating include the Arranger and the Originator, Banca Monte dei Paschi di Siena S.p.A.

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

DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

The historical performance data provided did not match the definition that DBRS bases its analysis on. The vintage performance data were based on a mix of static and dynamic default definitions covering different types of non-performing exposures (i.e., sofferenza, incagli, ristrutturati and past-due above 90 days on a semester basis). Unlike other Italian transactions where dynamic arrears data were provided, DBRS received additional data on cure rates and danger rates, which, combined with the historical data described above, allowed DBRS to determine an average annual default rate.

DBRS considers the information available to it for the purposes of providing these ratings to be 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.

These ratings concern newly issued financial instruments. These are the first DBRS ratings on these financial instruments.

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

To assess the impact of a change of the transaction parameters on the ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- PD Used: Base Case PD of 4.64%, a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 16.35% at the AAA (sf) stress level, 19.01% at the AA (high) (sf) stress level, 20.23% at the A (high) (sf) stress level and 27.07% at the B (low) (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 concludes that a hypothetical increase of the Base Case PD by 20%, ceteris paribus, would lead to a confirmation of the Class A1 Notes at AAA (sf) and a downgrade of the Class A2, Class B and Class C Notes to A (high) (sf), BBB (high) (sf) and CCC (high) (sf), respectively. A hypothetical decrease of the Base Case Recovery Rate by 20% would lead to a confirmation of the Class A1 Notes at AAA (sf) and a downgrade of the Class A2, Class B and Class C Notes to AA (low) (sf), A (low) (sf) and CCC (high) (sf), respectively. Finally, a scenario combining both an increase in the Base Case PD by 10% and a decrease in the Base Case Recovery Rate by 10% would lead to a confirmation of Class A1 at AAA (sf) and a downgrade of the Class A2, Class B and Class C Notes to AA (low) (sf), A (low) (sf) and CCC (high) (sf), respectively.

For further information on DBRS 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.

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

Lead Analyst: Marcello Bonassoli, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Senior Vice President
Initial Rating Date: 02 November 2016

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Registered in England and Wales: No. 7139960

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

-- Rating CLOs Backed by Loans to European SMEs
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Unified Interest Rate Model for European Securitisations
-- Rating CLOs and CDOs of Large Corporate Credit
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.