DBRS Upgrades Creso 2 S.r.l.’s Class A Notes Rating

DBRS Ratings Limited (DBRS) has today upgraded the rating on the Class A Notes issued by Creso 2 S.r.l. (the Issuer) to AA (sf) from A (high) (sf).

Today’s rating action follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies and defaults, as of the December 2016 payment date.
-- Updated portfolio default rate, loss given default (LGD) and expected loss assumptions for the remaining collateral pool.
-- Current available credit enhancement for the Class A Notes to cover the expected losses at the AA (sf) rating level.

Creso 2 S.r.l. is a securitisation of a portfolio of Italian residential mortgage loans originated and serviced by Nuova Cassa di Risparmio della Provincia di Chieti S.p.a. (Nuova Carichieti). The transaction follows the standard structure under Italian Securitisation Law and closed in August 2012.

PORTFOLIO PERFORMANCE
As of December 2016, loans more than 90 days delinquent as a percentage of the outstanding portfolio collateral balance were at 2.81%. Cumulative gross defaults as a percentage of the portfolio original balance increased steadily over the year and reached 4.61%.

PORTFOLIO ASSUMPTIONS
The mortgage pool is well seasoned (more than eight years), and it is geographically concentrated in the Abruzzo region in central Italy. In addition to the concentration risk, the transaction is also exposed to seismic risk. As a result, DBRS increased the Italian benchmark market value decline assumptions to accommodate for these specific risk elements of the portfolio.

DBRS conducted a loan-by-loan analysis on the remaining pool and updated the probability of default (PD) and LGD assumptions on the remaining collateral pool. At the AA (sf) rating level, the PD and LGD assumptions, including the sovereign adjustment, are 38.04% and 86.22%, respectively.

CREDIT ENHANCEMENT
The Class A Notes are supported by subordination of the Class B Notes and excess spread. Credit enhancement for the Class A Notes increased to 61.05% as of the December 2016 payment date from 51.65% as of the December 2015 payment date as a result of the amortisation of the Class A Notes.

The transaction benefits from an amortising reserve fund covering interest shortfall on the Class A Notes and items senior thereto. The reserve fund can also serve as credit enhancement when the Class A Notes are fully redeemed or at final legal maturity. The reserve fund is currently at the target level of EUR 7.69 million.

The Bank of New York Mellon (Luxembourg) S.A. Italian Branch is the Account Bank for this transaction. Its AA (low) DBRS public rating complies with the Minimum Institution Rating, given the rating assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is “Master European Structured Finance Surveillance Methodology.”

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

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 information provided by Zenit Service S.p.A., Nuova Carichieti and loan-by-loan data from the European DataWarehouse GmbH.

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

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

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

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

The last rating action on this transaction took place on 22 March 2016, when DBRS upgraded the rating on the Class A Notes to A (high) (sf) and removed its Under Review with Positive implications status.

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

To assess the impact of 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):

-- The Base Case PD and LGD of the current pool of mortgages for the Issuer are 14.29% and 76.37%, respectively. At the AA (sf) rating level, the corresponding PD is 38.04% and the LGD is 86.22%.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the Base Case assumption. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Class A Notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to remain at AA (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (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: Antonio Di Marco, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 2 August 2012

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.

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

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.