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

DBRS Ratings Limited (DBRS) assigned a rating of “A (sf)” to the EUR 155 million Class A Series 2 Notes, (together with the unrated Class J Series 2 Notes, the Notes) issued by Valconca SPV S.r.l (SME) (the Issuer).

The transaction is a cash flow securitisation collateralised by a portfolio of term loans originated by Banca Popolare Valconca S.C.p.a. (BPV or the Originator) to small and medium-sized enterprises (SMEs) and self-employed individuals based in Italy. As of 12 July 2018, the transaction’s transferred portfolio included 1,675 loans to 1,294 obligor groups, totalling EUR 217.40 million. The economic effect of the transfer of the portfolio from the Originator to the Issuer took place on 30 June 2018 (the Effective Date).

The rating of the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the Final Maturity Date, which falls in October 2060.

The final pool exhibits a high exposure to the “Building & Development” industry, representing 45.54% of the outstanding balance. The “Lodging & Casinos” (17.48%) and “Beverage & Tobacco” (7.32%) sectors have the second- and third-largest exposures based on the DBRS Industry classification.

The portfolio consists of loans to borrowers concentrated in the northern and central regions of Italy. The top two regions in the portfolio by geographic concentration are Emilia-Romagna and Marche, which respectively represented 77.25% and 21.86% of the outstanding portfolio notional amount as at the Effective Date. All other regions represented less than 0.25% of the portfolio at that time. Overall, the portfolio regional concentrations reflect the distribution of the Originator’s branches across Italy.

The portfolio exhibits high borrower concentrations; the largest three borrower groups each respectively represented 1.93%, 1.69% and 1.52% of the portfolio notional amount as at the Effective Date. Moreover, the top ten borrower groups represented 14.12% of the outstanding portfolio notional amount while the top 30 borrower groups comprised 29.90% as at the Effective Date.

Based on the data from the Valuation Date, 56.8% of the portfolio by loan balance is assumed to be secured by first-lien mortgages.

The Class A Notes benefit from 30.0% subordination of the Class J Notes. The Class J Notes were issued to fund part of the portfolio purchase and the cash reserve of the transaction, which is available to cover senior fees and interest on the Class A Notes. The cash reserve will amortise subject to the target levels and performance triggers. The Class J Notes interest and principal payments are subordinated to the Class A Notes.

The Class A Notes pay interest quarterly equal to three-month Euribor plus a margin of 0.50%. The interest payable on the Class A Notes is also floored at zero and capped at 3.00% which was reflected in DBRS cash flow analysis. DBRS has also factored an adjustment to account for basis and repricing risk given that there is no interest rate hedging mechanism in place.

The transaction lacks structural features to mitigate the set-off risk. DBRS assumed a loss of 50% of the initial set off risk, equal to 2.51% of the portfolio balance as at the Valuation Date. This was accounted for in DBRS’s cash flow analysis.

The DBRS rating of the Class A Notes is based on the following analytical considerations as per the principal methodology specified below:

-- The probability of default rate (PD) for the portfolio was determined using the historical performance information supplied. DBRS assumed an annualised PD of 5.43% based on PDs of 5.51% and 5.17% for mortgage and non-mortgage loans, respectively.

-- The assumed weighted-average life (WAL) of the portfolio was 6.65 years.

-- The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the assigned 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 70.52% and 16.25% were used for the secured and unsecured loans, respectively, at the “A (sf)” rating level.

-- The break-even rates for the interest rate stresses and default timings were determined using the DBRS Cash Flow tool.

Notes:

All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating 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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for the rating include the parties involved in the rating, including but not limited to the Originator, Banca Popolare Valconca and the Arranger, FISG S.r.l.

DBRS did 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 that DBRS bases its analysis on. The historical performance data was based on the “sofferenza” definition of default, which is different to the standard of 90 days used by DBRS. Additional dynamic arrears data were provided by the Originator to determine a conservative average annual default rate. DBRS opted to use dynamic delinquency data based on numbers of loans, adjusted with a multiplier to derive the comparable input data. DBRS considers the overall information available to it for the purposes of providing this rating was of satisfactory quality.

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

These ratings 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, 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”):

-- PD Used: Base Case PD of 5.43%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 41.36% at the A (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% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a downgrade of the 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 and US regulations only.

Lead Analyst: Maria Lopez, Vice President Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 July 2018

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.

--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
--Interest Rate Stresses for European Structured Finance Transactions
--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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.