DBRS Assigns Rating to Valsabbina SPV 1 S.r.l. (SME)

DBRS Ratings Limited (DBRS) has today assigned a rating to the Class A Notes issued by Valsabbina SPV 1 S.r.l. (the Issuer or Valsabbina SME) as follows:

-- EUR 400,000,000 Class A Asset Backed Floating Rate Notes due October 2052, rated A (low) (sf)

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date (October 2052). The Issuer has also issued EUR 255,400,000 Class B Asset Backed Notes due October 2052, which have not been rated by DBRS.

Valsabbina SME 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 Valsabbina S.C.p.A. (Banca Valsabbina or the Originator), but also for a small portion (1.1% of the pool) by Credito Veronese before being merged into Banca Valsabbina in 2012.

The same special-purpose vehicle (SPV) used for Valsabbina SME has been used for a previous securitisation of Banca Valsabbina, Valsabbina SPV 1 S.r.l. (RMBS). The Italian securitisation law guarantees complete segregation and separation between the two transactions even if they have been issued using the same SPV. However, some senior costs are shared by the two transactions and are equally split between the two deals. The use of multi-compartment SPVs is common in Italian securitisation transactions due to potential cost effective benefits.

The transaction includes a 23-month revolving period during which the Originator may sell new receivables (Further Portfolios) to the Issuer subject to certain conditions and limitations. The revolving period will end prematurely after the occurrence of certain events, including the cumulative gross default rate exceeding 4%, 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 as well as excess spread to make up for any defaulted loans. .

The economic effect of the transfer of the portfolio from the Originator to the Issuer took place on 31 October 2016 (the Initial Valuation Date). As of the Initial Valuation Date, the portfolio consisted of 4,870 loans extended to 4,206 borrowers, with an aggregate par balance of EUR 647.60 million, of which EUR 4.83 million is in arrears by fewer than 31 days.

The rating of the Class A Notes is based upon DBRS’s review of the following items:

(1) The portfolio characteristics:

-- The Purchase Conditions, the Common Criteria and Further Portfolio Specific Criteria, based on which DBRS has created a worst-case portfolio. Apart from the replenishment criteria on the industry sectors and geographical concentrations which are quite loose, the portfolio is not expected to differ relevantly from the initial one.

-- As per DBRS’s industry classification, the initial portfolio exhibits concentration in Building & Development, which represents 31.49% of the portfolio and could potentially go up to apoproximately 48% during the revolving period. However, the concentration of the initial pool in Real Estate and Construction activities as per NACE industry classification is lower than the average of the Italian banking system.

-- The portfolio is expected to have a short weighted average life (WAL) (3.65 years initially), given the large portion of non-mortgage loans (54.3% in the initial pool). DBRS expectations in terms of recoveries for the mortgage portion of the pool are low due to the presence of collateral types that the agency considers unsecured as well as the presence of second-ranking mortgages. DBRS analysis was based on maximising the mortgage portion of the pool (which can represent up to 50%), as it carries the highest loss expectations due to the higher associated PD.

-- 3.7% of the initial pool consist of loans granted to develop renewable energy projects, of which 1.2% of the pool has been granted to companies whose main business function is producing and selling electricity and that can be considered SPV-like companies. During the revolving period renewable energy loans are limited to 5%, but there are no limits on the amount of such loans granted to SPV-like companies, which might heavily rely on state subsidies for renewable energies.

-- The portfolio is granular, initially with no borrowers accounting for more than 1.2%, the top ten borrowers accounting for 7.9% and the top twenty borrowers for 12.7%. The Purchase Conditions limit the top one and twenty exposure to 2% and 15% of the portfolio, respectively.

(2) Banca Valsabbina is going through an expansion strategy into new markets in northern Italy via acquisition and openings of branches (nine in total), which might bring additional risks related to the revolving nature of the transaction.

(3) The deal is structured with an implicit principal deficiency ledger mechanism whereby provisioning occurs when a loan is classified as defaulted (i.e. classified as “sofferenza” or in arrears by 360 days or more). However, if the revolving period terminates prematurely, or the implicit undercollateralisation exceeds 5% or the cumulative gross default ratio exceeds 15%, the transaction will start trapping all excess spread to amortise the Class A Notes.

(4) The CR, which is amortising and maintained at 1.8% of the balance of the Class A Notes (initial balance equal to EUR 7.19 million) with a EUR 2.00 million floor. The CR is available to cover shortfalls of senior fees and interests on the Class A Notes as well as principal shortfalls at the Final Maturity Date.

(5) Banca Valsabbina acts as Servicer and Securitisation Services S.p.A. acts as Back-Up Servicer Facilitator. The appointment of a backup servicer will occur once the Servicer’s appointment has been terminated. To account for the lack of adequate mitigants to the commingling risk, DBRS has factored a loss in its cash flow model.

(6) The initial exposure to set-off risk is EUR 31.77 million, 4.91% of the initial pool (considering the full benefit of the deposit guarantee scheme). The Purchase Conditions limit the increase of set-off risk during the revolving period to 6.5% of the pool.

(7) Credit enhancement for the Class A Notes is 39.3%.

(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 rating of the Class A Notes as follows, as per the principal methodology specified below:
-- The annualised weighted-average probability of default (PD) for the securitised portfolio was 6.22%, based on a PD of 7.80% for mortgage loans and 4.69% for non-mortgage loans.
-- The assumed WAL of the portfolio was 4.68 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 57.63% and 16.25% were used for the secured and unsecured loans, respectively, at the A (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, FISG S.r.l. and the Originator, Banca Valsabbina S.C.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 vintage performance data provided did not match the definition on which DBRS bases its analysis. The historical performance data was based on the “sofferenza” definition of default, which is different from the standard of 180 days past due definition used by DBRS for Italian transactions. Additional dynamic arrears data was provided by the Originator to determine a conservative 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 6.22%, a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 32.02% at the A (low) (sf) stress level, a 10% and 20% decrease in the Base Case Recovery Rate. Note that the percentage decreases in the recovery rate 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 downgrade of the Class A Notes to BBB (high) (sf). A hypothetical decrease of the Base Case Recovery Rate by 20% would lead to a downgrade of the Class A Notes to BBB (high) (sf). 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 downgrade of Class A to BBB (high) (sf).

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: Jerry van Koolbergen, Managing Director
Initial Rating Date: 1 December 2016

DBRS Ratings Limited
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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.