The rating actions are as follows:

Class A (ISIN IT0005337735) EUR 288,500,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005337743), EUR 30,200,000: assigned a final rating of B_SF

Class J (ISIN IT0005337750), EUR 9,000,000: not rated

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 1,002m by gross book value. Based on Scope’s adjusted pool balance, as further explained below under the Quantitative analysis and key assumptions, the pool comprise both secured (53.2%) and unsecured (46.8%) loans. The loans were extended to companies (73.6%) and individuals (26.4%) and were originated by Banco di Desio e della Brianza S.p.A. and Banca Popolare di Spoleto S.p.A. Secured loans are backed by residential (44.4% of indexed property valuations) and non-residential (55.6%) properties that are highly concentrated in Milan (11%) and Rome (9.2%) and the non-metropolitan areas of the centre (41.5%) and the north (29.7%) of Italy. The issuer acquired the portfolio at the transfer date, 12 June 2018, but is entitled to all portfolio collections received since 31 December 2017 (portfolio cut-off date).

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 ranks senior to class A principal at closing but will be subordinated if actual collections are around 15% below the business plan prepared by the servicer. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes

Asset information reflects aggregation by loans and Scope’s pool adjustments highlighted in the quantitative analysis section.

Rating Rationale

The ratings are mainly driven by recovery amounts and timing from the NPL portfolio, which was acquired by the issuer at a 67.3% discount to the portfolio’s gross book value. Recovery and timing assumptions applied in the analysis incorporate Scope’s economic outlook for Italy and positive view of the special servicer’s capabilities. The ratings are supported by the structural protection provided to the notes, the absence of equity leakage provisions, liquidity protection, and an interest rate hedging agreement.

The ratings also address exposures to the key transaction counterparties: Cerved Credit Management S.p.A. (CCM) as special servicer; Cerved Master Services S.p.A. (CMS) as master servicer; Securitisation Services S.p.A. (Securitisation Services) as back-up servicer, representative of noteholders, and calculation agent; Zenith Service S.p.A. (Zenith Service) as monitoring agent; BNP Paribas Securities Services, Milan Branch (BNP Paribas Securities Services) as account bank, cash manager, and principal paying agent; and Banca IMI S.p.A. (Banca IMI) as interest rate cap provider. In order to assess counterparty risks Scope has taken into account its public rating on BNP Paribas (AA-/S1) the parent company of BNP Paris Securities Services and publicly available ratings on Banca IMI.

Scope applied a specific analysis to recoveries and has differentiated between secured and unsecured exposures. For secured exposures, collections were based mostly on the latest property appraisal values which were stressed to account for liquidity and market value risks; 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 market-wide recovery data on defaulted loans between 2000 and 2017 and calibrated recoveries, taking into account that unsecured borrowers were classified as defaulted for an average of 3.2 years as of closing.

Key rating drivers

Above-average collateralisation (positive). The Class A represents only 65.1% of the total assets security value (loan-to-value). This level is at the lower end of loan-to-values in recent peer transactions (65-85%) and remains relatively low after the market-value decline and fire sales discount stresses Scope has applied.

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

Liquidity protection (positive). A cash reserve representing 4.05% of the total outstanding balance of class A and class B notes protects the liquidity of senior noteholders, covering senior expenses and interest on class A notes for about four payment dates as of closing.

High share of foreclosures (positive). Around 67.4% of the portfolio’s first-lien secured gross book value corresponds to borrowers under a foreclosure. Compared with bankruptcies, foreclosures typically result in higher recoveries and are more quickly resolved.

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 the current trough will be driven by moderate private-sector indebtedness and improving property affordability.

Seasoned unsecured portfolio (negative). The weighted average time since default is approximately 3.2 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). Scope’s assumptions on fire sales 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.

Pool audit (negative). The findings of the pool audit showed a level of errors which is higher than what is normally seen in peer transactions. This is partially mitigated by (i) the fact that the servicer has committed to undertake a check of all loans against the reps and warranties and report then any discrepancies within 24 months after issuance and (ii) the sellers have increased the limit for indemnifications for loans that breach reps and warranties.

Positive rating change drivers

Legal costs. Scope has factored in the legal expenses for collections as detailed in the servicer’s business plan. A decrease in legal expenses could positively affect the ratings.

Servicer outperformance regarding recovery timing. Consistent servicer outperformance in terms of recovery timing could positively impact the ratings. Portfolio collections will be completed over a weighted average period of 4.0 years (3.6 years when considering collections already received), according to the servicer’s business plan. This is about 22 months faster than the recovery timing vector applied by Scope in its analysis (Scope expects recent legal reforms to have a positive impact on court performance and has applied a limited stress on recovery timing assumptions).

Negative rating change drivers

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

Interest rate cap. An interest rate cap, with an increasing strike schedule which ranges from 0.3% as of closing to 1.25% from January 2025, partly mitigates the risk of increased liabilities on the notes in the event of a rise in Euribor. 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 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.

Scope has adjusted the pool’s gross book value based on information regarding closed positions, collections and sold properties. Specifically, the analysis has excluded portfolio loans that the agency has assumed to be closed; based on collections already received and cash in court to be received. Collateral connected with these positions has also been removed. Overall, Scope’s adjustments have reduced the pool to EUR 968m in GBV by deducting the cash already collected and cash in court (where the latter is assumed to be received with a one-year delay). All stratifications in this press release include these adjustments.

For the analysis of the class A notes and taking into account the adjusted pool, Scope assumed a gross recovery rate of 41.4% over a weighted average life of 6.4 years (not taking into account collections already received). By portfolio segment, Scope assumed a gross recovery rate of 65.5% and 14.0% for the secured and unsecured portfolios, respectively. Scope applied a combined security value haircut of 34.8% which consists of the following subcomponents: fire-sale discount of 29.2% to security valuations, which reflect liquidity or marketability risks, as well as moderate property price decline stresses (6.9% on average), which reflect our view of downside market volatility risk.

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 structural features, such as the waterfall, note sizes, the coupon on the notes, hedging, senior costs, as well as fixed- and collections-based servicing fees. The outcome of the analysis produces 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 20%, four notches;
• an increase in the recovery lag by two years, two notches

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 B change compared to the assigned credit rating in the event of:

• a decrease in secured and unsecured recovery rates by 10%, zero notches;
• an increase in the recovery lag by one year, zero notches

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 Rating rationale and Quantitative analysis and key assumptions sections 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 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 outcome has a negative 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 Martin Hartmann, Associate Director
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The rating was first released by Scope on 25.06.2018
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
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions 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 does not, 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 other 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 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 GmbH at Lennéstrasse 5 D-10785 Berlin.

Scope Ratings GmbH, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director(s): Torsten Hinrichs.