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Rating Action:

Moody's assigns rating to SME ABS Notes issued by GIADA SEC. S.R.L.

21 Dec 2020

EUR 6,610 million of securities rated

Madrid, December 21, 2020 -- Moody's Investors Service ("Moody's") has today assigned the following rating to SME ABS Notes (the "Notes") issued by GIADA SEC. S.R.L. (the "Issuer"):

....EUR 6,610,000,000 Class A Asset Backed Floating Rate Notes due December 2052, Assigned A1 (sf)

Moody's has not assigned rating to the EUR 3,485,100,000 Class B Asset Backed Fixed Rate and Additional Return Notes due December 2052.

The transaction is a revolving cash securitisation of unsecured loans originated by Intesa Sanpaolo S.p.A.("ISP", Long Term Deposit Rating: Baa1 Not on Watch/ Short Term Deposit Rating: P-2 Not on Watch; Long Term Counterparty Risk Assessment: Baa2(cr) /Short Term Counterparty Risk Assessment: P-2(cr)).

RATINGS RATIONALE

The rating of the Notes is primarily based on the analysis of the credit quality of the underlying portfolio, the structural integrity of the transaction, the roles of external counterparties and the protection provided by credit enhancement.

In Moody's view, the credit positive features of this deal include, among others:

(i) very high granularity of the initial portfolio with top debtor group and top 5 debtor groups exposure being 0.1% and 0.6%, respectively;

(ii) 58.8% of the initial portfolio benefits from a public guarantee of the "Central guarantee fund for SME" established by the Italian government, where the guarantee coverage ranges from 30% to 90% of the loan amount;

(iii) lower than market average exposure to the Construction & Building sector (in terms of Moody's industry classification) as it represents 15% of the initial portfolio;

(iv) the transaction benefits from principal to pay interest mechanism for the rated notes;

(v) a substantial level of credit enhancement on Class A Notes, as their initial oustanding balance representing approximately 65.4% of securitized pool balance; and

(vi) the early amortisation and turbo amortisation triggers designed, respectively, to terminate the revolving period if cumulated defaults exceed 8.5% of the initial pool balance and to accelerate the amortisation of the senior notes if cumulated defaults exceed 15% of the initial pool balance.

However, the transaction has several challenging features, such as:

(i) a revolving period ending in March 2023 which could expose the portfolio to volatility. For instance, during the replenishment period, the weighted average 1-year default probability assigned by ISP to the borrowers of the total portfolio after the replenishment in full of the initial portfolio might increase to 1.8% from 1.2%;

(ii) potential renegotiation capabilities: the servicer can renegotiate several terms and conditions of the loans up to certain limits which could affect the loan maturity, the interest rate applied to the loans and extend or grant payment holidays relating to principal payments;

(iii) recently originated loans benefitting from an initial principal grace period represent 51.8% of the portfolio (around half of which expected to end by Q3 2022), while 17.2% of the pool is subject to the debt moratorium (mostly on both principal and interest payments) according to the Law Decree "Cura Italia", which has been offered to borrowers to overcome temporary liquidity problems resulting from the coronavirus outbreak;

(iv) exposure to fixed-floating interest rate risk (41.2% of the pool is referenced to fixed interest rates) which can increase with no limitation during the revolving period, however partially hedged through a cap on the interest rate payable of the Notes, as well as exposure to basis risk, given the discrepancy between the interest rates paid on the loan contracts compared to the reference rate of the Notes; and

(v) set-off risk, the net exposure estimated by Moody's to be at 12.2% which is partially mitigated through an additional cash reserve which will be funded in case ISP deposit rating is downgraded below Ba1.

The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of small businesses and corporates from the current weak Italian economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

- Key collateral assumptions:

Mean default rate: For the initial portfolio, Moody's assumed a mean default rate of 10% over a weighted average life of 2.4 years (equivalent to a B1 proxy rating as per Moody's Idealized Default Rates). Moody's assumed a deterioration of the credit quality of the portfolio during the revolving period resulting in a mean default rate of 12.6% over a weighted average life of 3 years (equivalent to a B1/B2 proxy rating as per Moody's Idealized Default Rates) for the replenishment pool. This assumption is based on: (1) the available historical vintage data, (2) the performance of the previous transactions originated by the ISP, (3) the characteristics of the loan-by-loan portfolio information and (4) the portfolio replenishing criteria during the revolving period. Moody's took also into account the current economic environment and its potential impact on the portfolio's future performance, as well as industry outlooks or past observed cyclicality of sector-specific delinquency and default rates.

Default rate volatility: Moody's assumed a coefficient of variation (i.e. the ratio of standard deviation over the mean default rate explained above) of 59.7% for both the initial and the replenished portfolios, as a result of the analysis of the portfolio concentrations in terms of single obligors and industry sectors.

Recovery rate: Moody's assumed a 50% fixed recovery rate, primarily based on the characteristics of the collateral-specific loan-by-loan portfolio information, including the public loan guarantees in place, complemented by the available historical vintage data. Because the guarantees provided by the "Central guarantee fund for SME" are one of the main drivers for the recovery, Moody's assessed the impact of the lower recovery that would result from downgrade or default of the Italian government (rated Baa3).

Portfolio credit enhancement: the aforementioned assumptions correspond to an initial portfolio credit enhancement of 17%, that takes into account the Government of Italy's current local currency country ceiling (LCC) of Aa3.

As of 9 November 2020, the definitive asset pool of underlying assets was composed of a portfolio of 54,173 contracts amounting to EUR 10,063.7 million. The top industry sector in the pool, in terms of Moody's industry classification, is Construction & Building (14.95%). The top borrower represents 0.1% of the portfolio and the effective number of obligors is 6,274. The assets were originated between 2015 and 2020 and have a weighted average seasoning of 0.9 years and a weighted average remaining term of 4.3 years. The interest rate is floating for 58.8% of the pool while the remaining part of the pool bears a fixed interest rate. The weighted average spread on the floating portion is 1.8%, while the weighted average interest on the fixed portion is 1.6%. Geographically, the pool is concentrated mostly in Lombardy (26.2%), Veneto (13.4%) and Emilia Romagna (11.1%).

- Key transaction structure features:

Reserve fund: The transaction benefits from an amortising cash reserve sized at EUR 112 million, equivalent to 1.7% of the initial balance of the Class A Notes, and fully funded at closing through a loan from ISP. The cash reserve is replenished in the waterfall immediately after payment of interest on the Class A Notes, therefore mainly acting as a source of liquidity for the Class A Notes. The cash reserve will be reduced to zero after the Class A Notes are fully redeemed.

- Counterparty risk analysis:

ISP will act as servicer of the portfolio, as well as account bank. To ensure payment continuity over the transaction's lifetime, the transaction documents incorporate estimation language according to which the calculation agent, Banca Finanziaria Internazionale S.p.A. ("Banca FinInt", not rated), will prepare the payment report based on estimates if the servicer report is not available. In such a case, only interest on the Class A Notes and items senior thereto will be paid. Neither Back-up Servicer nor Back-up Servicer Facilitator was appointed at closing although the transaction benefits from the presence of an independent cash manager, Banca FinInt.

All of the payments under the loans are collected by ISP into its account. Within two days from the collection date, funds are transferred to the collection account in the name of the Issuer and held with ISP. The cash reserve will also be held in an account with ISP. The account bank has a replacement trigger set at loss of Baa3 deposit rating.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was "Moody's Global Approach to Rating SME Balance Sheet Securitizations" published in May 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1225856. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING:

The Notes' rating is sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change. The evolution of the associated counterparties risk, the level of credit enhancement and the Italy's country risk could also impact the Notes' rating.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gaston Wieder
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Monica Curti
VP - Senior Credit Officer
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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