The rating actions are as follows:

Class A (ISIN IT0005331472), EUR 2,918.2m: assigned a final rating of BBB+_SF

Class B (ISIN IT0005319139), EUR 847.6m: not rated

Class J (ISIN IT0005319147), EUR 565.0m: not rated

Scope has published its rating report on SIENA NPL 2018 S.R.L. The report contains details about Scope’s analysis.

Click here to access the full rating report

SIENA NPL 2018 is a static cash securitisation of first lien secured (41.6% of gross book value, or GBV) and unsecured as well as junior lien secured (58.4%) non-performing loans (NPLs) extended to borrowers in Italy. The loans were originated by Banca Monte dei Paschi di Siena S.p.A. (around 84% of GBV); MPS Capital Services Banca per le Imprese S.p.A. (around 15.3% of GBV) and MPS Leasing & Factoring S.p.A. (around 0.7% of GBV), all of which belong to the Banca Monte dei Paschi di Siena banking group (MPS) and were granted to companies (81%) and individuals (19%). The portfolio is very granular with the top 10 and top 100 borrowers respectively accounting for only 2.1% and 9.5% of GBV. The first lien secured loans are backed by commercial, industrial or other non-residential properties (71.8% of GBV) as well as residential properties (28.2%). The loans are quite well distributed geographically based on borrower location with (in terms of GBV) 36% located in the north, 36% in the centre and 28% in the south of Italy.

Rating rationale

The ratings reflect: i) the legal and financial structure of the transaction; ii) the quality of the underlying collateral given the cyclical rebound in the Italian macroeconomic environment; iii) the ability of Credito Fondiario S.p.A as master servicer and special servicer; iv) the ability of Italfondiario S.p.A.; Juliet S.p.A. an untested, newly-formed joint venture between Quaestio Holding S.p.A. and Cerved S.p.A. to which a part of MPS’ servicing operations will be transferred; as well as Prelios Credit Servicing S.p.A. as special servicers; v) the counterparty exposure to BNP Paribas Securities Services, Milan Branch (the parent company BNP Paribas SA is rated AA-/S-1 Stable by Scope) as account bank and paying agent; vi) the counterparty exposure to Intesa Sanpaolo S.p.A. (rated A/S-1 by Scope) as operating bank; vii) the counterparty exposure to Securitisation Services S.p.A, which acts, inter alia, as calculation agent and representative of noteholders; and viii) the counterparty exposure to HSBC Bank Plc and Mediobanca S.p.A. as interest rate cap providers. 

The relatively limited liquidity protection for the Class A notes constrains their rating. The rating is also driven by Scope’s expected recovery amount and timing assumptions for the NPL portfolio which was acquired by the issuer at a discount of approximately 79% relative to the portfolio’s GBV. Scope’s recovery and timing assumptions incorporate the agency’s positive assessment of the four special servicers’ capabilities and the incentive scheme which applies to all of them. The rating also reflects Scope’s stable economic outlook for Italy. The rating is supported by the structural protection provided by sequential principal amortisation, the absence of equity leakage provisions, an interest rate cap and an inherent cap on the calculation of the Class B interest due senior in the waterfall. The rating also takes into account the trigger that subordinates Class B interest to Class A principal if cumulative collections fall below 50% of the expected amount set out in the appendix to the master servicing agreement.

Scope’s analysis is based on the portfolio cut-off date of 30 September 2017, collections after the cut-off date and the removal of closed positions after the cut-off date. When analysing the pool, Scope treated the data on a loan-by-loan basis and connected the various collateral to the loans. The numbers in this press release are based on this loan-by-loan data. The portfolio was acquired by the issuer on 20 December 2017, the asset transfer date. However, the issuer is entitled to all portfolio collections received from the cut-off date onwards, and on the payment date of 30 April around EUR 215.9m (the collections from 28 December 2017 until 31 March 2017) was used to, inter alia, pay senior fees, interest on the notes and, specifically, to amortise the Class A notes for an amount equal to EUR 177.4m while around EUR 108m of collections realised between 1 October 2017 and 28 December were used on 28 December to fill up the cash reserve, the recovery expense reserve and pay some initial costs.

Key rating drivers

High credit enhancement (positive): The Class A notes are backed by around 87.5% credit enhancement as a proportion of GBV, which is around 12 to 20 percentage points higher than for most other public NPL securitisations in Italy.

Portfolio servicing (positive): Four independent special servicers limit the transaction’s sensitivity to a servicer disruption. The master servicer will assist the issuer in finding a suitable replacement in the event of a servicer disruption and the other special servicers could step in. In addition, the fee structure aligns the special servicers’ incentives with investors’ interests.

Granular and geographically diversified pool (positive): The pool is very granular as the top 10 and top 100 borrowers respectively account for only 2.1% and 9.5% of GBV. The geographical locations of the assets securing the first lien loans are well distributed over Italy with around 36% located in the north, 36% in the centre and 28% in the south of Italy.

High portion of proceedings in advanced stages (positive): Around 35.2% of the secured loans are in the auction phase and 6.7% are in the distribution phase, which reduces the expected time to collections compared with those loans which are still in the initial phases of legal proceedings.

Real estate operating company (REOCO) (positive): At the request of the special servicers and the issuer, a REOCO can purchase illiquid properties that have been put up for auction if it believes that the properties can be resold at a higher price. A well-functioning REOCO can help to improve the recoveries for illiquid assets by removing them from the judicial process. Adequate property management and capex investments can increase the likelihood of reselling them for a higher price at a later stage.

Senior notes’ liquidity protection (negative): A 3.5% cash reserve provides liquidity to senior noteholders, covering senior fees and interest on Class A notes for around one year. This liquidity coverage is lower than the 18-24 month coverage seen in most other public securitisations. The fact that the pool is serviced by four different special servicers mitigates against a complete servicer disruption with no collections at all from the portfolio.

Low proportion of new valuations (negative): Only around 10% of the properties backing the secured loans have a new drive-by or full valuation made by an independent party. Around 15% of the properties have a Consulenza Tecnica d’Ufficio “CTU” valuation. Almost two-thirds of the valuations (approximately 65%) are indexations of the original valuation made when the loan was disbursed or valuations based on other types of statistical method. Finally, the remaining 10% of the properties have an updated valuation prepared by MPS.

Relatively large proportion of loans treated as unsecured (negative): Due to limited available information regarding loans backed by a second or more junior lien, Scope has classified these loans as unsecured. As a result, Scope has treated 58.4% of the portfolio’s GBV as unsecured, which is a comparatively high proportion compared with most other public NPL securitisations. Expected recoveries from unsecured loans are generally significantly lower than those from secured loans. In addition, the weighted average seasoning of the unsecured portion is relatively high (around 4.8 years). Ageing unsecured loans generally have lower recovery prospects.

Loans not covered by reps and warranties (negative): Some loans with encumbrances (e.g. attachments, seizures or pledges made in favour of third parties) or limitations on transferability (e.g. due to specific clauses in the loan contract or intercreditor agreements for syndicated loans) have been identified in the transfer agreement. These loans are not covered by the reps and warranties that generally exclude encumbrances and limitations to transferability. Scope has excluded the loans with encumbrances and considered that the collections for those loans with limitations on transferability may have to pass through the sellers and could therefore be lost or delayed. As a result, only half of the collections for the loans with limitations on transferability have been considered, which is congruent with an assumed probability of insolvency for the sellers of 50% over the transaction’s life.

REOCO waterfall (negative): Payment of the deferred purchase price is not completely senior; rather some costs and expenses incurred by the REOCO will be paid pari passu with the payment of the deferred purchase price to the issuer. Consequently, the issuer will not receive the full payment of the purchase price if the proceeds from the resale of the property are not high enough over the deferred purchase price to also cover the costs paid pari passu. The fact that any shortfalls are aggregated and deducted from the investment limit of EUR 100m reduces the potential negative impact of the REOCO for the issuer to EUR 100m, or less than 1% of the value of the properties backing the secured loans.

Positive rating-change drivers

Improved liquidity coverage: Improved liquidity coverage for the Class A notes could positively impact the ratings.

Servicer outperformance: The servicers’ consistent outperformance of their initial business plans 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 significantly.

Quantitative analysis and key assumptions

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

Scope applied a separate analytical framework to estimate collections on secured and unsecured exposures. For secured exposures, collections were mostly based on collateral values; recovery timing assumptions were derived using line-by-line information detailing 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 4.8 years as of closing.

Regarding the secured loans, Scope estimated the recoveries for each based on: the loan balance, the mortgage inscription, the estimated asset value after applicable haircuts and the estimated time it would take to conclude the process in each relevant court.

For the analysis of the Class A notes, Scope applied a total combined haircut to the value of the properties backing the secured loans, ranging between 27.6% and 48.9% depending on the asset type, asset location and valuation type. This combined haircut consists of several components, all of which have been applied in a multiplicative way. The total combined haircut reflects: i) a BBB rating-conditional, market-value-decline assumption ranging between 3.5% and 8.8% depending on the asset location; ii) a BBB firesale discount assumption ranging between 25% and 30% depending on asset type, which, together with the market value decline, is called the security value haircut (BBB rating-conditional security value haircuts range between 27.6% and 36.2% depending on the asset type and location); iii) an additional haircut of 20% for indexed valuations where applicable; iv) an additional haircut of 10% for CTU valuations where applicable; and v) an additional haircut of 5% for internal valuations where applicable. Scope’s assumption regarding the fire sale discount depends, inter alia, on a sample of more than 30,000 positions showing the auction assignment values together with qualitative adjustments for different types of asset.

In addition to considering borrower concentration, Scope captured the resulting idiosyncratic risk by reducing recovery assumptions for the top 10 borrowers by a further 10%. Legal expenses and procedural costs were deducted at a flat rate of 5% from the estimated collections in each period.

In order to estimate the timing for the assumed cash flows, Scope 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 included additional time for steps in the procedure not covered by the data before applying 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) ranges between 4-11 years and 7-21 years. Scope also included an additional 3-12 month ramp-up period for the onboarding activities that each special servicer must complete when it takes over the servicing of its part of the portfolio and before the servicing activities become fully efficient. The longest ramp-up period was applied to the untested special servicer. Scope reflected the high loan-to-value risk in its recovery assumption for the secured positions by using the updated property value, or mortgage inscription value if lower, as the basis upon which to apply the haircuts.

For the unsecured positions, Scope’s projected cash flows are based on loan-by-loan data from MPS and vintage data from the special servicers. The data was adjusted to consider both the capability of the special servicers compared to MPS and the specific seasoning in the pool. Scope applied rating-conditional stresses to the expected recovery rates. The seasoning-adjusted expected recovery rate for unsecured loans used to analyse Class A reflecting a BBB rating-conditional stress is 9.2%. The expected recoveries from unsecured loans are spread out over 15 years.

Stress testing

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

Cash flow analysis

In order to consider structural features, such as the waterfall, note sizes, the coupon on the notes, hedging, senior costs, and particularly both fixed and collections-based servicing fees, Scope analysed the cash flow vectors from the assets with a cash flow tool that also includes the structural features and servicing costs of the transaction. The present value of the losses on each series of notes from the cash flow tool together with the weighted average life of the notes was compared with Scope’s expected loss tables. Scope also considers qualitative factors when assigning ratings.

Rating sensitivity

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.
Scope tested the sensitivity of the analysis to deviations from the main input assumptions: i) recovery-rate level; and ii) recovery timing.
The following shows how the results for Class A change compared to the assigned credit rating in the event of:

• a decrease in secured and unsecured recovery rates by 10%, negative 0 notches; and
• an increase in the secured recovery lag of two years, negative 0 notches  

Methodology
The methodologies applied for this rating is the General Structured Finance Methodology. Scope also applied the principles contained in the Methodology for Counterparty Risk in Structured Finance’. 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.
Historical default rates of 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 definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.

Solicitation, key sources and quality of information
The rated entity and/or 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 relied on a third-party asset audit. The external asset audit has a neutral impact on the credit rating.
Prior to the issuance of the rating, the rated entity was given the opportunity to review the rating and the principal grounds on which the credit rating is based. Following that review, the rating was not amended before being issued.

Regulatory Disclosures
This credit rating is issued by Scope Ratings GmbH.
Lead analyst David Bergman, Executive Director
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The rating was first released by Scope on 10 May 2018

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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