The rating actions are as follows:

Class A (ISIN IT0005336943), EUR 1,656,504,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005336950), EUR 152,908,000: not rated

Class J (ISIN IT0005336968), EUR 50,969,000: not rated

The transaction is a cash securitisation of a static Italian NPL portfolio of EUR 5,097m by gross book value. The portfolio comprises both secured (71.6%) and unsecured (30.4%) loans. The loans were extended to companies (71.6%) and individuals (28.4%) and were originated by Banco BPM and Banca Popolare di Milano, both part of the Banco BPM Group. Secured loans are backed by residential (54.8% of property valuations) and non-residential (45.2%) properties which are highly concentrated in the metropolitan area of Milan (10.3%) and other northern Italian regions (57.5%). The issuer acquired the portfolio at the closing date, 14 June 2018, but is entitled to all portfolio collections received since 30 September 2017 (the portfolio cut-off date).

Asset information reflects aggregation by loans.

The structure comprises three classes of notes with fully sequential principal amortisation: senior class A, mezzanine class B, and junior class J. The class B interest margin ranks senior to class A principal at closing but will be deferred if special servicer performance triggers are breached, while the index component always ranks junior to class A principal. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes.

Rating rationale

The ratings are mainly driven by recovery amounts and timing from the NPL portfolio, which was acquired by the issuer at a 63.5% discount relative to the portfolio’s gross book value. Scope’s recovery and timing assumptions incorporate its economic outlook for Italy, as well as a positive assessment of the special servicer’s capabilities. The ratings are supported by the structural protection provided to the notes, the absence of equity leakage provisions, by liquidity protection, and interest rate hedging agreements.

The ratings also address exposures to the key transaction counterparties: Prelios Credit Servicing, special and master servicer; Securitisation Servicers, noteholders’ representative, calculation agent, monitoring agent and back-up master servicer; The Bank of New York Mellon, account bank, paying agent and cash manager; Banco BPM, interim collections account bank; and Mediobanca-Banca di Credito Finanziario and Banco Santander, as interest rate cap providers. Scope factored counterparty replacement triggers implemented in the transaction into its analysis, and relied on Scope’s rating on Banco Santander and publicly available ratings on The Bank of New York Mellon, Banco BPM and Mediobanca.

Scope performed a specific analysis for secured and unsecured exposures. For secured exposures, collection assumptions were mostly based on up-to-date property appraisal values which were stressed to account for liquidity and market value risks, while recovery timing assumptions were derived using line-by-line asset information detailing the type of legal proceeding, the court issuing the proceeding, and the stage of the proceeding at the cut-off date. For unsecured exposures, Scope used historical, line-by-line recovery data on defaulted loans between 2000 and 2016 and calibrated recoveries, considering unsecured borrowers to be classified as defaulted for an average of 3.5 years as of closing.

Key rating drivers

Loan types (positive): The quality of the portfolio is high compared to peer transactions rated by Scope because it includes a greater relative share of first lien secured loans, which offer better recovery rates on average, and a large proportion of residential collateral, thus reducing concentration risks.

Location (positive): The portfolio is concentrated in the metropolitan area of Milan and other northern Italian regions. These regions benefit from the most dynamic economic conditions in the country and, in general, the most efficient tribunals.

Granularity (positive): Concentration in the portfolio is low compared to peer transactions rated by Scope. The 10 and 100 largest borrower exposures account for 1.8% and 9.1% of gross book value, respectively.

Portfolio servicing (positive): The performance fee structure reasonably aligns incentives between the servicers and the investors. In the event of a servicer disruption, the monitoring agent will assist the issuer in finding a suitable replacement.

Liquidity protection (positive): A cash reserve representing 4% of the outstanding class A and class B notes’ balance protects the liquidity of senior noteholders, covering senior expenses and interest on class A notes for about four payment dates as of closing.

Real estate recovery (positive): Scope expects a gradual recovery of Italian real estate prices, notwithstanding weak medium-term economic growth potential. The cyclical recovery from current trough levels will be driven by moderate private sector indebtedness and an improving property affordability trend.

Seasoned unsecured portfolio (negative): The weighted average time since loan default is approximately 3.5 years for the unsecured portion. Most unsecured recoveries are realised in the first years after a default according to historical data.

Collateral liquidity risk (negative): Fire-sale discount assumptions constitute the primary source of portfolio performance stresses.

Collateral appraisal values (negative): NPL collateral appraisals are more uncertain than standard appraisals because repossessed assets are more likely to deteriorate in value.

Class B margin seniority (negative): The margin component of class B interest ranks senior to class A principal at closing and will only be deferred if the special servicer does not meet at least 70% of the business plan collections schedule. The level of the trigger is low relative to peer transactions rated by Scope.

Positive rating-change drivers

Legal costs: A decrease in legal expenses could positively affect the ratings.

Servicer recovery timing outperformance: Consistent servicer outperformance in terms of recovery timing could positively impact the ratings. Portfolio collections will be completed over a weighted average period of about 4.5 years, according to the servicers’ business plan. This is about 2 years faster than the recovery timing vector applied for the analysis. Scope expects recent legal reforms to have a positive impact on court performance and has applied a limited stress to recovery timing assumptions.

Negative rating-change drivers

Fragile economic growth: The trajectory of Italy’s public debt is a cause for concern given weak medium-term growth potential of 0.75% alongside the new government’s plans to roll back reform, raise spending and cut taxes.

Interest rate cap: Delayed recoveries beyond Scope’s stressed recovery timing vector would increase the mismatch between the swap notional and the outstanding principal of the rated notes.

Quantitative analysis and key assumptions

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

For the analysis of the class A notes, Scope assumed a gross recovery rate of 48.0% over a weighted average life of 6.6 years. With regard to the portfolio segments, Scope assumed a gross recovery rate of 62.8% and 12.3% for the secured and unsecured portfolios, respectively. The rating agency applied an average fire-sale discount of 29.1% to security valuations, which reflects liquidity or marketability risks, as well as moderate property price decline stresses (6.9% on average) which reflect its view of limited downside market volatility risk. Scope factored in the legal expenses for collections detailed in the servicer business plan, which average about 11% of gross collections and are relatively high compared with peer transactions.Scope also took into account the impact of the interest rate cap, with an increasing strike schedule which ranges from 0.5% as of closing to 2% from May 2026 and partly mitigates the risk of increased liabilities on the notes in the event of a rise in Euribor levels.

Stress testing

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

Cash flow analysis

Scope analysed the cash flow vectors from the assets and took into account the transaction’s main structural features, such as the notes’ priorities of payment, note sizes, the coupon on the notes, hedging, and senior costs as well as fixed- and collections-based servicing fees. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

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: recovery-rate level and 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%: minus 3 notches;
• an increase in the recovery lag by one year, negative: minus 1 notch

Methodology

The methodology 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.

Solicitation, key sources and quality of information

The rated entity and/or its agents participated / did not participate 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 it 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: Antonio Casado, Director
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The rating was first released by Scope on 15 June 2018
The rating concern a financial instrument, which has been rated by Scope for the first time.

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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