DBRS Confirms Rating on Emilia SPV S.r.l.

DBRS Ratings Limited (DBRS) has today confirmed the rating on the Class A Notes issued by Emilia SPV S.r.l. (the Issuer) at A (sf).

Today’s rating action reflects an annual review of the transaction and is based on the following analytical considerations:
-- An amendment to the Servicing Agreement, Transfer Agreement and Master Definition Agreement & Terms and Conditions (the Amendment) signed on 16 June 2017.
-- Portfolio performance, in terms of delinquencies and defaults, as of the May 2017 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 A (sf) rating level.

Emilia SPV S.r.l. is an Italian securitisation of first lien residential mortgage loans originated and serviced by Credito Emiliano S.p.A. (CREDEM). The transaction follows the standard Italian structure under the Italian Securitisation Law nr. 130. The transaction closed in April 2015 and has a remaining three-year Replenishment Period during which time the Issuer can purchase Subsequent Portfolios at each payment date. Purchases of Subsequent Portfolios are funded through further issuance of the Class A and Class B Notes subject to a total amount of EUR 3,900,000,000. Purchase of Subsequent Portfolios is subject to eligibility criteria of the Initial Portfolio and portfolio limits defined in the transaction documents.

TRANSACTION AMENDMENT
The Amendment envisages to provide the Servicer with more flexibility to manage the portfolio. The overall limit on renegotiations providing the decrease of the interest rate or the margin is now set at 15% of the aggregate original pool balance (from 5%), while the overall limit on renegotiations providing the switch of floating loans to fixed loans is now set at 5% of the aggregate original pool balance (from 3%). In addition, CREDEM can now repurchase loans up to an overall limit of 30% of the aggregate original pool balance (from 15%).

Additional changes introduced to the transaction are intended to provide the Issuer with more flexibility to purchase Subsequent Portfolios. After any additional purchase, the portfolio must comply with certain limits set in the transaction documents. Some of these portolio limits have been amended. Loans granted to self-employed borrowers are limited to a maximum of 13% of the outstanding portfolio balance (from 11% prior to the Amendment), while loans granted to employed borrowers must be at least 77% (from 79%). Portfolio limits on sector of activity and geographic distribution of the borrowers have been amended as well, helping the pool to meet the required thresholds. Loans paying floating rate must be at least 45% of the outstanding portfolio balance (from 53%), whereas loans paying fixed or optional rate are limited to a maximum of 43% (from 35%). DBRS bases its analysis on the worst-case replenishment criteria set forth in the transaction legal documents and as such has factored those amendments into its rating analysis.

PORTFOLIO PERFORMANCE
From May 2016 to May 2017, the 0-60 days delinquent loans slightly decreased to 1.36% from 1.43%, the 60-90 days delinquent loans decreased to 0.20% from 0.24%, and the loans 90+ days delinquent decreased to 0.29% from 0.55% last year. No defaulted loans, defined as loans classified as “sofferenza” or unlikely to pay in in accordance with the Bank of Italy’s supervisory regulation, have been recorded so far. Repurchases currently stand at 11.2% of the aggregate original pool.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the outstanding pool and updated the probability of default (PD) and LGD assumptions on the remaining collateral pool. At the A (sf) rating level, the PD and LGD assumptions including the sovereign adjustment are 40.1% and 45.2%, respectively.

CREDIT ENHANCEMENT
Credit enhancement for the Class A Notes at the Issue Date was 18.50%, consisting of subordination of the Class B Notes. During the Replenishment Period, credit enhancement for the Class A Notes is adjusted following the purchase of Subsequent Portfolios. On each payment date during the Replenishment Period following the purchase of Subsequent Portfolios, credit enhancement for the Class A Notes is defined based on a calculation defined in the transaction documents determined by the current loan-to-value and coupon of each loan in the portfolio at the valuation date. The current credit enhancement is above the floor of 18.5%.

The Reserve Fund has been established through an over-issuance of the Class B notes (2.25% of the Initial Portfolio equal to EUR 22,528,000). The Reserve Fund is available to pay senior fees and interest on the Class A Notes if collections are insufficient to meet the payments due. During the Replenishment Period, the Reserve Fund will increase in an amount equal to 2.25% of the further amount paid on the notes (both Class A and Class B). The Cash Reserve is currently at its target amount of EUR 32.3 million.

CREDEM acts as the Account Bank for the transaction. The DBRS private rating of CREDEM 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 Transactions” 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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

DBRS reviewed the aforementioned amendments executed on 16 June 2017. A review of any other transaction legal documents was not conducted as they 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 data and information used for this rating include a servicer report provided by CREDEM, payment and investor reports provided by Securitisation Services S.p.A. 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 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 April 2016, when DBRS confirmed the rating on the Class A Notes at A (sf).

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 18.3% and 30.8%, respectively. At the A (sf) rating level, the corresponding PD is 40.1% and the LGD is 45.2%.
-- 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 fall to BBB (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Class A Notes would be expected to fall to BB (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 BB (low) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of BBB (low) (sf)
-- 50% increase in PD, expected rating of BB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (low) (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: Vito Natale, Head of EU RMBS & CBs
Initial Rating Date: 19 November 2014

DBRS Ratings Limited
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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

-- 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