The transaction securitizes a pool of mortgage and non-mortgage loans that BPER granted to small and midsize enterprises (SMEs) in Italy.
The seller and originator is Banca Popolare dell'Emilia Romagna (BPER), one of the largest cooperative banks in Italy. This is the first SME-backed transaction originated by BPER.
The issuer is a special-purpose entity (SPE), incorporated as a limited-liability company in Italy under article 3 of Law 130. The issuance of the class A and B euro-denominated notes funds the issuer's purchase of the portfolio of securitized loans.
Our 'A- (sf)' rating on the class A notes reflects our assessment of the credit and cash flow characteristics of the underlying asset pool, as well as our analysis of the counterparty and operational risks of the transaction. Our analysis indicates that the credit enhancement available to the class A notes is sufficient to mitigate the credit and cash flow risks to a 'A- (sf)' rating level.
Our ratings reflect our assessment of the following factors:
Operational and servicing risk.
BPER has an in-depth knowledge of the local market in which it operates (in the Emilia Romagna region of Italy), where about 78% of the securitized portfolio is located. Emilia Romagna is one of the Northern wealthier Italian regions. Our rating on the class A notes reflects our assessment of the company's origination policies and our evaluation of its ability to fulfil its role as servicer under the transaction documents, among other factors. The transaction didn't have a back-up servicer at closing. However, we believe that the availability of potential back-up servicers in the Italian market for this asset class mitigates the risk posed by a servicing discontinuity. Additionally, our cash flow model incorporated a stressed servicing fee that we deemed to be sufficient to provide an economic incentive for a new servicer to step in. There are also mechanisms in place to ensure that borrowers' payments are diverted on time to the SPE's eligible accounts, if the servicer becomes insolvent.
The collateral is a static pool of non-mortgage and mortgage loans to Italian SME borrowers. We have analyzed credit risk by applying our SME criteria (see "Methodology And Assumptions: Update To The Criteria For Rating European SME Securitizations," published on Jan. 6, 2009).
Our projected weighted-average gross default assumption is 28.8% under a 'A-' rating scenario, with a 11.9% base case. Our assumed recovery rate is 28.5% under a 'A-' rating scenario. We based our assumptions on the originator's data, the portfolio's characteristics (such as the geographic concentration), and the macroeconomic outlook for Italy (see "The Eurozone's New Recession--Confirmed," Sept. 25, 2012).
Cash flow risk.
Our rating on the class A notes reflects our assessment of the transaction's credit and cash flow characteristics. We tested the transaction's cash flows in a model that simulated the rating stress scenarios. In our modeling approach, we run several different scenarios at each rating level, combining different interest rate patterns with different prepayment rates.
Additionally, we have decreased the margin received under the portfolio to account for the basis risk related to the lack of hedging in this transaction, or to account for the possibility of the portfolio experiencing a reduction in yield--linked to the fact that higher-yielding loans may have a higher propensity to default or to prepay. Our analysis indicates that the level of credit enhancement available to the rated notes is sufficient to withstand the credit and cash flow stresses that we apply at a 'A-' rating level for the class A notes, so that the rated notes received timely interest and ultimate principal payments by final maturity.
Our rating on the class A notes also reflects the fact that the transaction's exposure to counterparty risk is adequately mitigated through the replacement/remedy mechanisms in the transaction documents.
We have analyzed counterparty risk by applying our 2012 counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on Nov. 29, 2012). The minimum rating required for the transaction account provider under the transaction documents is 'BBB-', which therefore supports a maximum potential 'A- (sf)'rating on the notes. Since the transaction's exposure to counterparty risk is considered to be "limited" under our 2012 counterparty criteria, the maximum potential rating on the supported security (in this case, the class A notes) is 'A- (sf)'.
The issuer is an SPE established to issue securitization notes. This is the first issuance made out of this SPE--further securitizations are allowed under the transaction documents, but are subject to rating agency confirmation. We consider the issuer to be in line with our European legal criteria for bankruptcy-remoteness (see "European Legal Criteria For Structured Finance Transactions," published on Aug. 28, 2008).
The application of our nonsovereign ratings criteria permit a maximum rating differential of up to six notches between our ratings in this transaction and the related EMU sovereign (in this case, Italy [unsolicited; BBB+/Negative/A-2]). Our nonsovereign ratings criteria therefore cap at 'AA+ (sf)' the maximum potential ratings in the transaction (see "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions," published on June 14, 2011).
POTENTIAL EFFECTS OF PROPOSED CRITERIA CHANGES
We have taken today's rating actions based on our criteria for small and midsize enterprises (SMEs) (see "Related Criteria And Research"). However, these criteria are under review (see "Request For Comment: European SME CLO Methodology And Assumptions," published on Jan. 17, 2012).
As a result of this review, our future European SME criteria may differ from our current criteria. The criteria change may affect the ratings on all outstanding notes in this transaction. Until such time that we adopt new criteria, we will continue to rate and surveil these transactions using our existing criteria (see "Related Criteria And Research").
RELATED CRITERIA AND RESEARCH
-- Counterparty Risk Framework Methodology And Assumptions, Nov. 29, 2012
-- Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, Sept. 17, 2009
-- Methodology And Assumptions: Update To The Criteria For Rating European SME Securitizations, Jan. 6, 2009
-- European Legal Criteria For Structured Finance Transactions, Aug. 28, 2008
-- Criteria Update: Rating Leasing Securitizations In Italy, May 3, 2006
-- European Consumer Finance Criteria, March 10, 2000
-- The Eurozone's New Recession--Confirmed, Sept. 25, 2012
-- How Standard & Poor's Applies its Criteria To Bank Branches In The EU And Eurozone, July 27, 2012
-- Request For Comment: European SME CLO Methodology And Assumptions, Jan. 17, 2012
-- Italy's Unsolicited Ratings Lowered To 'BBB+/A-2'; Outlook Negative, Jan. 13, 2012
-- European Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, March 14, 2012
-- Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011
-- Banca Popolare dell'Emilia Romagna S.C., June 1 2012
Class Rating Amount
ESTENSE S.M.E. S.R.L.
EUR2,157 Million Asset-Backed Floating-Rate Notes
A A- (sf) 1,488
B NR 668.7