DBRS Assigns Ratings to MCC RMBS S.r.l.

DBRS Ratings Limited (DBRS) has today assigned a rating of AA (sf) to the Class A Notes issued by MCC RMBS S.r.l. (the Issuer).

The rating of the Class A Notes addresses timely payment of interest and ultimate payment of principal on or before the legal final maturity date.

The Issuer is a limited liability company incorporated in 2016 under the laws of the Republic of Italy.

This is the first residential mortgage-backed securities (RMBS) transaction originated by Banca del Mezzogiorno – Mediocredito Centrale S.p.a. (BdM or the Originator), a small Italian bank fully owned by Poste Italiane S.p.A. (Poste).

The originator and servicer of the transaction is BdM. The back-up servicer is Securitisation Services S.p.a. The Account Bank, Computation Agent and Principal Paying Agent is BNP Paribas Securities Services SA, Milan branch. The DBRS private ratings of the Account Bank comply with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology, given the AA (sf) rating assigned to the Class A Notes.

The notes are backed by a portfolio of first lien loans (for further details, please refer to the rating report). The transaction has an unindexed weighted-average current loan-to-value (WACLTV) of 59.74% and an unindexed weighted-average original loan-to-value (WAOLTV) of 63.31% (both calculated utilising the original unindexed properties value) and there are no mortgages with original LTV higher than 80%. The loans in the transaction are granted to Bank of Italy SAE code 600 for individuals. The Portfolio comprised approximately 14.03% of loans originated to employees of the BdM’s parent company, Poste DBRS has incorporated this concentration risk in its analysis, adjusting the probability of default of the Portfolio (for further details on the Portfolio please refer to the rating report).

The portfolio interest rate is primarily linked to three-month Euribor (55.51%). Additionally, the portfolio has exposure to ECB rates (22.28%), fixed rate (21.75%) and a residual exposure to one-month Euribor (0.46%). The portfolio includes loans with the option to switch the interest rate from fixed to floating, and vice versa, at a predefined date (10.47%).

Credit enhancement for the Class A Notes is calculated as 23.62%, provided by the subordination of the portion of the Class B Notes collateralised by the mortgage portfolio. The cash reserve has been funded through an over-issuance of the Class B Notes at EUR 8,000,000 (2.50% of the initial balance of the Class A Notes) and can amortise during the life of the transaction to 2.50% of the current outstanding of the Class A Notes from the second payment date. The cash reserve has a floor at EUR 5,000,000. The cash reserve is available to pay the senior fees and the interest on the Class A Notes.

The Class A Notes pay quarterly interest in arrears equal to three-month Euribor plus a margin of 80 basis points. The waterfall for payments of interest and principal on the notes combines both revenue and principal receipts from the mortgage portfolio. Until the Class A Notes are redeemed in full, any payment can be made on the Class B Notes.

The servicing agreement allows loans to be renegotiated. The renegotiations can be related to spread/interest rate reduction, renegotiation to fixed or floating loans or both capital and interest payment holidays. DBRS has modelled the possible impact of these renegotiations in its cash flow analysis based on the limits included in the transaction documents.

For further details on the analysis, please refer to the rating report available on www.dbrs.com.

The ratings are based upon DBRS review of the following analytical considerations:

-- Transaction capital structure and form and sufficiency of available credit enhancement.

-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to terms in which they have invested.

-- The transaction parties’ capabilities with respect to originations, underwriting, servicing and financial strength.

-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and the consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

-- Incorporation of a sovereign-related stress component in the stress scenarios due to the rating assigned by DBRS to the Republic of Italy of A (low), Under Review with Negative Implications.

As part of its analysis, DBRS has investigated the sensitivity of the transaction base case default and recovery assumptions to a potential downgrade of the Italian sovereign rating. DBRS has concluded that a potential downgrade of the Republic of Italy sovereign rating, as envisaged in the sovereign rating action taken on 5 August 2016 (please see DBRS press releases, “DBRS Places Italy A (low) Under Review with Negative Implications on Heightened Risks” (5 August 2016) and “DBRS Extends Review of Italy’s Ratings until After December Referendum” (3 November 2016)), would not in itself affect the ratings assigned to the Class A Notes.

As a result of these analytical considerations, DBRS derived a Base Case probability of default (PD) of 16.08% and loss given default (LGD) of 13.76%, which resulted in an expected loss (EL) of 2.21% using the European RMBS Credit Model. DBRS cash flow model assumptions stress the timing of defaults and recoveries, prepayment speeds and interest rates. Based on a combination of these assumptions, a total of 20 cash flow scenarios were applied to test the capital structure and ratings of the notes. The cash flows were analysed using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda.

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. This 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’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for these ratings include working papers and data on the Italian economy and housing market provided by the European Central Bank, Eurostat, Bank of Italy and Istituto Nazionale di Statistica (ISTAT). DBRS reviewed the origination and servicing practices of Banca del Mezzogiorno – Mediocredito Centrale S.p.a. in July 2016. The Originator provided loan-level data, historical performance of the mortgage portfolio and the Portfolio’s payment history dating back to 2012. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

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

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.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

These ratings were disclosed to Banca IMI S.p.a. as arranger of the Originator.

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

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

To assess the impact of a change in the transaction parameters (probability of defaults and/or loss given default) on the rating of Class A Notes, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- In respect of the Class A Notes and a rating category of AA (sf), the PD of 48.39%, a 25% and 50% increase on the PD.
-- In respect of the Class A Notes and a rating category of AA (sf), LGD of 35.30%, a 25% and 50% increase on the LGD.

DBRS concludes that for the Class A Notes:
-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to downgrade the Class A Notes to BBB (low) (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (low) (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (low) (sf).

For further information on DBRS historic 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.

Initial Lead Analyst: Davide Nesa, Senior Financial Analyst
Initial Rating Date: 7 November 2016
Initial Rating Committee Chair: Quincy Tang, Managing Director

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

The rating methodologies used in the analysis of this transaction are listed below:

-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Unified Interest Rate Model for European Securitisations

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

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.