The rating actions are as follows:

Class A1 (IT0005391096): EUR 90.0m: assigned a final rating of AAA_SF

Class A2 (IT0005391146): EUR 200.0m: assigned a final rating of AAA_SF

Class J (Floating Rate Notes): EUR 229.4m: not rated

Transaction overview

Credico Finance 18 S.r.l is a true-sale securitisation of a EUR 519.4m portfolio of secured (67.6%) and unsecured (32.4%) loans granted to SMEs in Italy. The exposures are well-seasoned and were primarily extended to micro-SMEs in northern and central Italy. The security on the secured loans are mainly comprised of mortgages, with a weighted average current loan-to-value (CLTV) of 45.4%.

The loans were issued by 14 Italian cooperative banks: EMIL Banca Credito Cooperativo - Società Cooperativa, BCC Umbria Credito Cooperativo Società Cooperativa, Banca della Marca Credito Cooperativo – Società Cooperativa, Banca di Credito Cooperativo Abruzzese - Cappelle sul Tavo s.c.p.a. a Mutualità Prevalente, Banca Alpi Marittime Credito Cooperativo Carrù Società Cooperativa per Azioni, Banca del Piceno Credito Cooperativo, Banca di Credito Cooperativo di Alba, Langhe, Roero e del Canavese – Società Cooperativa, Credito Cooperativo Ravennate, Forlivese e Imolese - Società Cooperativa, Banca di Credito Cooperativo di Ostra e Morro d’Alba - Società Cooperativa, Banca Patavina Credito Cooperativo di Sant’Elena e Piove di Sacco - Società Cooperativa, Banca di Credito Cooperativo di Pontassieve – Società Cooperativa, Banca di Credito Cooperativo di Recanati e Colmurano – Società Cooperativa, Banca di Credito Cooperativo dei Colli Albani - Società Cooperativa, and Banca Mediocredito del Friuli Venezia Giulia S.p.A. Each originator acts as seller and servicer of its respective loan portfolio in the context of the transaction.

The capital structure is comprised of two senior notes and 14 classes of pari passu junior notes. Class A1 and Class A2 interest payments are pro-rata while principal payments are fully sequential. Each of the 14 originators has extended a loan to fund the non-amortising EUR 11.6m reserve fund, which provides liquidity and credit enhancement to the rated instruments. The reserve covers approximately 1.6 years of senior fees and interest on the rated notes. Amortisation of the notes mimics amortisation of the non-defaulted assets, while defaulted obligations accelerate amortisation of the senior notes via excess spread trapping. The rated notes also benefit from a combined principal and interest waterfall. Significant credit enhancement is provided via subordination, the reserve fund and excess spread. Payments are quarterly and the legal maturity is 12 April 2057.

Class A1 and A2 notes respectively benefit from 84.9% and 46.4% credit enhancement at closing, as well as 0.42% of excess spread (assuming 1% annual senior fees and costs) that protects against potential portfolio losses. Class A1 is expected to amortise over a weighted average life of 0.5 years, while class A2 has an expected weighted average life of 1.8 years.

Rating rationale

The ratings reflect: i) the strong credit enhancement and liquidity protection mechanisms embedded in the transaction; ii) Scope’s future expectations of asset performance based on the analysis of historical data that spanned a full economic cycle; and iii) the roles and abilities of the key transaction counterparties.

The ratings incorporate transaction counterparty risk. ICCREA Banca S.p.A. (Iccrea) essentially serves as an intermediary bank between the cooperative banks and the issuer account bank that sits with BNP Paribas Securities Services (BNP Paribas). Iccrea is effectively the parent of the 14 cooperative banks, and Scope considers the credit quality of the 14 banks to be in line with that of Iccrea. Iccrea is publicly rated and is directly supervised by the European Central Bank (ECB). Frequent cash sweeps and servicer diversification partially mitigate against commingling risk and potential operational disruptions. Zenith Service provides further comfort as the designated back-up servicer. Replacement triggers are in place should the credit-quality of BNP Paribas fall below BBB. Scope’s credit analysis of BNP Paribas conforms with the assigned ratings.

Key rating drivers

Credit enhancement (positive). Class A1 benefits from 84.9% credit enhancement from subordination and a EUR 11.6m cash reserve. Class A2 benefits from 46.4% credit enhancement, which also includes the cash reserve.

Liquidity protection (positive). A non-amortising cash reserve covers approximately 1.6 years of senior fees and interest.

Parent bank (positive). Iccrea Banca is an experienced, systemically important bank supervised by the ECB. It is closely integrated with the cooperative banks, providing operational support and cross-financial guarantees to ensure liquidity and funding. Iccrea has 10+ years of experience coordinating with Italian cooperative banks in the securitisation markets.

Seasoned loans (positive). The portfolio’s weighted average seasoning of 5.1 years indicates a sizeable portion of the borrowers have successfully weathered a period of severe economic stress.

Secured loan recoveries (negative). Low recovery rates on secured loans were evident in our review of vintage data and may be indicative of below average recovery abilities of some servicers on defaulted loans. This is reflected in our 45% base case recovery rate assumption.

Set-off (negative). The transaction has no structural mitigants against set-off risk. Scope has given credit to the Italian deposit guarantee scheme, but approximately 9.1% of the portfolio balance is exposed to set-off risk after accounting for the guarantee scheme.

Fixed floating rate mismatch (negative). At closing approximately 5% of the portfolio pays a fixed rate while the notes are indexed to 3-month Euribor. Further, servicers may convert into fixed interest rate loans an additional 5% of the portfolio’s floating rate exposures. A spike in 3-month Euribor would reduce available excess spread.

Negative rating-change driver

Worse-than-expected asset performance exemplified by a higher-than-expected default rate or lower-than-expected recovery upon asset default would negatively impact the ratings.

Quantitative analysis and assumptions

A cash flow analysis was performed considering the collateral portfolio’s characteristics and the transaction’s main structural features. Scope applied a large homogenous portfolio approximation approach when analysing the collateral pool and projecting cash flows over the expected amortisation period. The cash flow analysis used a probability distribution of the portfolio’s default rate, following an inverse Gaussian distribution, to calculate the expected loss of each rated tranche. The analysis also provides the expected weighted average life of each tranche.

Scope assumed a mean default rate of 17.0% and a coefficient of variation of 40.0% for the secured portion of the portfolio, which has an expected weighted average life of 6.7 years. Scope considered a base case recovery rate of 45.0% and a rating-conditional AAA recovery rate of 20.3%. A 3.2% weighted average interest rate was assumed for the fixed rate portion of the secured portfolio. An all-in weighted average margin of 1.85% was assumed for the floating rate portion of the secured portfolio.

Scoped assumed a mean default rate of 7.0% and a coefficient of variation of 60.0% for the unsecured portion of the portfolio, which has an expected weighted average life of 3.7 years. Scope considered a base case recovery rate of 25.0% and a rating-conditional AAA recovery rate of 15.0%. A 2.7% weighted average interest rate was assumed for the fixed rate portion of the unsecured portfolio. An all-in weighted average margin of 1.8% was assumed for the floating rate portion of the unsecured portfolio.

Scope has taken into account vintage default, recovery, prepayment and delinquency data spanning 2009 – 2018. The loan book data provided by the originators is deemed to be sufficiently representative of the securitised portfolio. Scope made no long-term adjustments to the default rate and coefficient of variation, given that the data captures a full economic cycle in Italy.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations of the main input parameters: the mean-default rate and the recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results change when the portfolio’s expected mean default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

• Class A1: sensitivity to default rate, zero notches; sensitivity to recovery rate, zero notches
   
• Class A2: sensitivity to default rate, zero notches; sensitivity to recovery rate, zero notches

Stress testing
Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope performed a cash flow analysis of the transaction with the use of Scope Cash Flow SF EL Model Version 1.1.0. incorporating default and recovery rate assumptions over the portfolio’s amortisation period, considering the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for these ratings are the SME ABS Rating Methodology and the Methodology for Counterparty Risk in Structured Finance, available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
Scope analysts are available to discuss all the details of the rating analysis and the risks to which this transaction is exposed.

Solicitation, key sources and quality of information
The rated entity and its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings GmbH has received a third-party asset due diligence assessment. The external due diligence assessment was considered when preparing the ratings and it has no impact on the credit rating. Prior to the issuance of the ratings, the rated entity was given the opportunity to review the ratings and the principal grounds on which the credit ratings are based. Following that review, the ratings were not amended before being issued.

Regulatory disclosures
These credit ratings are issued by Scope Ratings GmbH.
Lead analyst Thomas Miller-Jones, Associate Director.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The ratings were first released by Scope on 5 December 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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