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      Scope assigns BBB(SF) to the Class A notes  issued by Popolare Bari NPLs 2017 S.r.l. – NPL ABS
      TUESDAY, 05/12/2017 - Scope Ratings AG
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      Scope assigns BBB(SF) to the Class A notes issued by Popolare Bari NPLs 2017 S.r.l. – NPL ABS

      Scope has assigned final ratings to the notes issued by Popolare Bari NPLs 2017 S.r.l., a static cash securitisation of non-performing loans (NPLs) extended to Italian borrowers.

      The rating actions are as follows:

      Class A (ISIN IT0005316275), EUR 80.9 million: assigned a final rating of BBBSF
      Class B (ISIN IT0005316283), EUR 10.1 million: assigned a final rating of B+SF
      Class J (ISIN IT0005316291), EUR 13.45 million: not rated

      Scope Ratings today publishes the detailed rating report for Popolare Bari NPLs 2017 S.r.l. The report contains details about Scope’s analysis.

      Click here to access the full rating report

      Popolare Bari NPLs 2017 is a static cash securitisation of secured (56% of gross book value) and unsecured (44%) non-performing loans (NPL) extended to borrowers in Italy. The loans were originated by Banca Popolare di Bari S.c.p.a. (around 95%) and Cassa di Risparmio di Orvieto S.p.A. (around 5%), which both belong to the Banca Popolare di Bari banking group, and were extended to companies (88.9%) and individuals (11.1%). The portfolio is highly concentrated: the top-10 and top-100 borrowers respectively account for 28.2% and 69.0% of gross book value (GBV). The secured loans are backed mainly by first-lien residential, commercial and industrial properties and are concentrated in the Italian regions of Abruzzo (33.1% of GBV) and Puglia (13.0%).

      Rating rationale

      The ratings are mainly driven by Scope’s recovery amount and timing assumptions for the NPL portfolio, which was acquired by the issuer at a 68% discount relative to the portfolio’s GBV. The assumptions incorporate Scope’s positive assessment of the special servicer’s capabilities and incentives. The assumptions also reflect Scope´s stable economic outlook on Italy and the macroeconomic situation characterised by a gradual recovery and progress in delivering structural reforms. The ratings are supported by the structural protection provided by sequential principal amortisation, the absence of equity leakage provisions, liquidity protection for class A, and interest rate hedging agreements. The ratings also take into account the trigger which can subordinate Class B interest to Class A principal.

      The ratings address exposures to the key transaction counterparties: PRECS, the servicer covering both the special servicing and master servicer activities; Securitisation Services S.p.A, which acts as inter alia calculation agent and representative of noteholders; Zenith Service S.p.A, the monitoring agent; BNP Paribas Securities Services (a subsidiary of BNP Paribas SA, rated AA-/S-1 Stable by Scope), which acts as account bank, agent bank, cash manager and principal paying agent; and JP Morgan AG, interest rate cap provider.

      Scope’s analysis is based on the portfolio cut-off date of 31 March 2017. The portfolio was acquired by the issuer on 16 November 2017, the asset transfer date. However, the issuer is entitled to all portfolio collections received from the cut-off date onwards. Such collections amounted to EUR 8.1 million as of 16 November 2017.

      Key rating drivers

      Portfolio servicing (positive). The fee structure aligns the servicer’s incentives with investors’ interests. PRECS has a solid track record of servicing non-performing portfolios. The monitoring agent will assist the issuer in finding a suitable replacement in the event of a servicer disruption and the special servicer has provided a line-by-line business plan at closing, detailing the expected collections and legal expenses for each loan.

      Ongoing economic recovery (positive). Italian GDP increased moderately in 2016, with a yearly growth rate of 1% compared to 0.7% in 2015. Recent indicators point to an ongoing, yet gradual, recovery with a growth rate of around 1.5% as per Q3 2017. Scope expects moderate economic expansion of around 1% to continue in 2018, which positively affects expectations regarding the amount and timing of portfolio recoveries.

      Senior notes’ liquidity protection (positive). A 4% cash reserve provides liquidity to senior noteholders, covering senior fees and interest on Class A notes for two to three payment dates.

      Legal reforms (positive). Scope expects that recent legal reforms will have a positive impact on court performance.

      Relatively high portion of foreclosure proceedings (positive). Around 49.5% of the portfolio’s GBV corresponds to borrowers in a foreclosure proceeding while bankruptcy proceedings represent around 46.5% of the portfolio’s GBV and the remainder are out-of-court proceedings. Compared with bankruptcies, foreclosure proceedings typically result in higher recoveries and take less time to be resolved.

      Extensive servicer-repossession data (positive). Scope has received detailed repossession data which shows the price at which the properties were sold in the auction process and also the valuations which were done before the sale of the property in the auction process.

      Seasoned unsecured portfolio (negative). The weighted average time since the default date is around 6.0 years for the unsecured portion. Historical data shows that most recoveries are received in the first years after a default.

      Concentrated portfolio (negative). The top-10 and top-100 debtors respectively account for 28.2% and 69.0% the portfolio’s GBV.

      Asset location (negative). Around 71.3% of loan collateral and 66.7% of unsecured borrowers are located in regions from the south of Italy. In general the south of Italy has less a dynamic economy than northern and central Italy and many of the slowest tribunals can be found in the south, although there are exceptions. Scope has captured this situation by applying security value haircuts and deriving granular assumptions regarding the time it takes to complete a foreclosure or bankruptcy for different courts in Italy.

      High loan-to-value (LTV) ratios (negative). For many of the secured loans the current outstanding loan balance is significantly higher than the updated appraisal value of the property backing the loan leading to an estimated weighted average (WA) LTV of around 172% for the secured positions.

      Positive rating-change drivers

      Servicer outperformance. The servicer’s consistent outperformance of its initial business plan in terms of recovery rates and timing could positively impact the ratings.

      Negative rating-change drivers

      Collateral appraisal values. NPL collateral appraisals are more uncertain than standard appraisals, because repossessed assets are more likely to deteriorate. The ratings could be negatively impacted if the sales proceeds from the collateral are significantly lower than the appraisal values.

      Ineffectiveness of legal reforms. The ratings could be downgraded if recent legal reforms prove unsuccessful and recovery timings deteriorate.

      Interest rate cap. A 0.1% cap interest rate swap partially hedges the transaction against interest rate risks. Delayed recovery causing the swap notional to fall below the outstanding principal of the rated notes would negatively affect the ratings if the 6 month EURIBOR rate at that point in time is above the cap rate.

      Quantitative analysis and key assumptions

      Scope has performed a cash flow analysis, which considers the structural features, in order to calculate the expected loss and expected weighted average life for each tranche. As a first step Scope has analysed the assets in order to produce a cash flow vector of gross recoveries.

      Scope applied a separate analytical framework to estimate collections on secured and unsecured exposures. For secured exposures, collections were based mostly on collateral values; recovery timing assumptions were derived using line-by-line information that details the type of legal proceeding and the stage of recovery at the cut-off date. For unsecured exposures, Scope used recovery vintage data calibrated to take into account the fact that unsecured borrowers were classified as defaulted for an average of 6.0 years as of closing.

      For the secured loans Scope estimated the recoveries for each loan based on: the loan balance, the mortgage inscription, the estimated asset value after applicable haircuts and the estimated time it takes to conclude the process in each court. Scope applies a security value haircut to the assets backing the secured loans. This haircut reflects Scope´s forward looking market-value-decline and fire sale discounts assumptions. Scope´s market value decline assumptions incorporate a rating conditional stress component, which depends on the type and location of the asset. Fire sale discount assumptions are based on auction assignment values using a sample of more than 10,000 positions. The security value haircuts used to analyse Class A (BBB rating conditional stress) range between 37.6% and 45.3% while for analysing Class B (B rating conditional stress) the haircuts range between 30.5% and 35.8%. In addition to consider borrower concentration, Scope has captured the resulting idiosyncratic risk by reducing recovery assumptions for the top-10 borrowers, by a further 10%.

      In order to estimate the timing for the assumed cash flows Scope has used data from the Ministry of Justice regarding the time it takes to go through a foreclosure or bankruptcy procedure in each court; the expected time to foreclose is in the range of 2-9 years, while the range for bankruptcy procedures is 4-18 years. Scope added additional time for steps in the procedure not covered by the data and Scope then applied a rating conditional stress to the expected recovery time. The recovery time for foreclosures and bankruptcies used to analyse Class A (BBB rating conditional stress) range between 4-11 years and 7-21 years while in the B rating scenario the recovery lag assumptions were respectively 3-10 years and 5-19 years. By using the updated property value or mortgage inscription value, if lower as the base on which to apply the haircuts Scope has reflected the high LTV risk in its recovery assumption for the secured positions.

      For the unsecured positions Scope developed a cash flow vector based on vintage data for similar loans adjusted for the specific seasoning in the pool. On top of this Scope applied rating conditional stresses to the expected recovery rates. The expected recovery rate for unsecured loans used to analyse Class A (BBB rating conditional stress) is 13.6% while for the analysis of Class B (B rating conditional stress) 19.4% was used as recovery rate for the unsecured loans. The expected recoveries from unsecured loans are spread out over more than 15 years.

      Rating sensitivity1

      Scope tested the resilience of the ratings against deviations from expected recovery rates and recovery timing. 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 sensitivity to a decrease of secured and unsecured recovery rates by 10% at all ratings scenarios is three notches for both classes of notes.

      The sensitivity to an increase of the recovery lag by two years is of three notches for both classes or notes.

      1 An editorial error in this section of the original press release was corrected on 07.06.2018. The original press release made reference to bond model sensitivities.

      Methodology

      The methodologies applied for this rating is the General Structured Finance Methodology, dated August 2017. Scope also applied the principles contained in the Methodology for Counterparty Risk in Structured Finance’ dated August 2017. All documents are available on www.scoperatings.com. More detail regarding the approach applied can be found in the quantitative analysis and key assumptions section above.

      Scope analysts are available to discuss all the details of the rating analysis and the risks to which this transaction is exposed.

      Regulatory and legal disclosures

      Important information
      Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

      Responsibility
      The party responsible for the dissemination of the credit rating is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr Stefan Bund.

      The rating analysis was prepared by Antonio Casado, Director, Lead Analyst
      Responsible for approving the rating: Guillaume Jolivet, Managing Director

      Rating history
      The rating concerns newly issued financial instruments which were evaluated for the first time by Scope Ratings AG.

      Information on interests and conflicts of interest
      The rating was prepared independently by Scope Ratings but for a fee based on a mandate from the issuer of the investment, represented by the management company. The issuer has participated in the rating process.

      As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, hold any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

      Key sources of information for the rating
      The following substantially material sources of information were used to prepare the credit rating: the 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 has not undertaken any assessment of agreed upon procedure reports carried out at the level of underlying financial instruments or other assets of structured finance instruments. Scope has relied on a third-party assessment and the use of such third-party assessment had a neutral impact on the credit ratings assigned.

      Examination of the rating by the rated entity prior to publication
      Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

      Methodology
      The methodologies applicable for this rating are the ‘General Structured Finance Rating Methodology’ dated August 2017, and the ‘Methodology for Counterparty Risk in Structured Finance’ dated August 2017. Files are available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on 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 default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

      Conditions of use / exclusion of liability
      © 2017 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings AG, Scope Analysis GmbH, Scope Investor Services GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings AG at Lennéstrasse 5 D-10785 Berlin.

      Rating issued by
      Scope Ratings AG, Lennéstrasse 5, 10785 Berlin.

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