DBRS Confirms Ratings on Azzurro SPV s.r.l.

DBRS Ratings Limited (DBRS) took the following rating actions on the bonds issued by Azzurro SPV s.r.l. (the Issuer):
-- Class A notes confirmed at A (low) (sf)
-- Class B notes confirmed at BBB (sf)

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the Final Maturity Date in December 2033. The rating on the Class B Notes addresses the ultimate payment of interest and principal on or before the Final Maturity Date. The Class C notes are not rated by DBRS.

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- The overall portfolio performance as of the May 2018 payment date, particulary with regard to delinquencies and net losses;
-- No purchase termination events have occurred;
-- The probability of default (PD), loss given default (LGD) and expected loss assumptions on the collateral pool; and
-- The current available credit enhancement (CE) to the Class A notes and Class B notes (the Rated Notes) to cover the expected losses assumed at their respective rating levels.

The Issuer is an Italian securitisation of salary assignment loans and payment delegation receivables granted by Fincontinuo S.p.A. (Fincontinuo) to both private and public employees, as well as pension assignment receivables. The receivables are serviced by Zenith Service S.p.A.

As at 31 May 2018, the Class A balance was EUR 45.2 million, the Class B balance was EUR 5.1 million and the Class C balance was EUR 12.6 million, up from an aggregate balance of EUR 10.6 million at closing.

PORTFOLIO PERFORMANCE
As at the May 2018 payment date, loans delinquent by one, two and three months represented 7.2%, 0.5% and 0.3% of the outstanding portfolio balance, respectively, while delinquencies greater than three months were 0.2%. Gross cumulative defaults were 0.4% of the original portfolio and cumulative transferred receivables, with cumulative recoveries of 57.5%.

RAMP-UP PERIOD
The transaction, which closed in June 2017, includes an 18-month ramp-up period, scheduled to end in November 2018. During this time, Fincontinuo may offer new receivables to the Issuer, subject to certain conditions and limitations. The acquisition of additional receivables is funded both through principal collections generated by the securitised portfolio and further proceeds from the subscription payments of the notes.

The ramp-up period will end prematurely upon the occurrence of a Purchase Termination Event, which include triggers such as gross cumulative defaults exceeding 3.0% of the aggregate transferred receivables, the Issuer being unable to fully replenish the cash reserve or the insolvency of Fincontinuo.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the remaining pool and updated its base case PD and LGD assumptions to 10.6% and 46.2%, respectively.

CREDIT ENHANCEMENT
As at the May 2018 payment date, the Class A notes had a subordination of 28.1% and the Class B notes had a subordination of 20.0%.

During the ramp-up period, additional notes’ subscriptions are allowed if certain conditions are met, including the size of the Class A notes being equal to 80% of the aggregate of the portfolio balance and the cash reserve amount, and Class B notes balance being equal to 9% of the aggregate of the portfolio balance and the cash reserve amount. Following the end of the ramp-up period, the amortisation of the notes will be fully sequential.

A cash reserve account, currently funded with EUR 1.1 million, is available to cover senior expenses and missed interest payments on the Class A notes and, prior to the occurrence of a Class B Trigger Event, on the Class B notes as well. The required level of the cash reserve is set at 2.0% of the portfolio balance during the ramp-up period, and 4.0% afterwards, subject to a floor that will be equal to 1.0% of the portfolio balance at the end of the ramp-up period.

Additionally, a prepayment reserve is available to cover prepayment losses related to capitalised fees that may be retained upon prepayment. The prepayment reserve target amount is equal to 1.0% of the portfolio balance during the ramp-up period, and 2.0% during the amortisation period.

BNP Paribas Securities Services, Milan branch (BNP Milan) acts as the Account Bank for the transaction. DBRS’s private rating of BNP Milan is consistent with the Minimum Institution Rating, given the ratings assigned to the Rated Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

The Issuer entered into an interest rate cap agreement with Natixis S.A. (Natixis) to mitigate the interest rate mismatch between the Rated Notes, indexed to one-month Euribor, and the fixed interest rate payments on the securitised portfolio. The DBRS private rating of Natixis is consistent with the First Rating Threshold defined in DBRS’s “Derivative Criteria for European Structured Finance Transactions”.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “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.

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 “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 these ratings include servicer and investor reports provided by Zenith Service S.p.A. and loan-by-loan data provided by Fincontinuo through its agents.

DBRS does 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 these ratings to be of satisfactory quality.

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

This is the first rating action since the Initial Rating Date.

The lead responsibilities for this transaction have been transferred to Joana Seara da Costa.

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the “Base Case”):

-- DBRS expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.

-- The base case PD and LGD of the current pool are 10.6% and 46.2%, respectively. At the A (low) (sf) rating level, the corresponding PD is 24.2% and the LGD is 59.0%, and at the BBB (sf) rating level the correspondoing PD is 17.8% and the LGD is 59.9%.

-- The Risk Sensitivity overview below illustrates the ratings expected for the Rated Notes if the PD and LGD increase by certain percentages over the base case assumptions. For example, if the LGD increases by 50%, the rating on the Class A notes would be expected to decrease to BBB (high) (sf) and the rating on the Class B notes would be expected to decrease to BB (high) (sf), all else being equal. If the PD increases by 50%, the rating on the Class A notes would be expected to decrease to BBB (high) (sf) and the rating on the Class B notes would be expected to decrease to BB (high) (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A notes would be expected decrease to BB (high) (sf) and the rating on the Class B notes would be expected to decrease to B (sf), all else being equal.

Class A risk sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Class B risk sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (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 (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (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 and US regulations only.

Lead Analyst: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 7 June 2017

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.

-- Master European Structured Finance Surveillance Methodology
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers

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.