The rating actions are as follows:

Class A (ISIN IT0005338717), EUR 282,000,000: assigned a final rating of BBB-_SF

Class B (ISIN IT0005338741), EUR 31,400,000: assigned a final rating of B+_SF

Class J (ISIN IT0005338758), EUR 10,460,000: not rated
 

For the detailed research report please click HERE¹

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 1,046m by gross book value. The pool comprises both secured (70.0%) and unsecured (30.0%) loans; the proportions indicated are based on Scope’s adjusted pool balance, explained below under the section ‘quantitative analysis and key assumptions’.

The loans were extended to companies (85.7%) and individuals (14.3%) and were originated by 21 Italian cooperative banks coordinated by Iccrea S.p.A. and two banks belonging to ICCREA Banca S.p.A. (BCC Abbruzzese Capelle sul Tavo ; Credito Cooperativo Mediocrati; Banca del Valdarno - Credito Cooperativo; La Cassa Rurale Banca di Credito Cooperativo di Treviglio sc; Terre Etrusche e di Maremma Credito Cooperativo Società Cooperativa Banca Tema; Banca Credito Cooperativo "G. Toniolo" di San Cataldo - società cooperativa; RIMINIBANCA Credito Cooperativo di Rimini e Valmarecchia s.c.; Credito Cooperativo ravennate, forlivese e imolese Soc. Coop.; Banca di Pescia e Cascina; B.C.C del Garda - Banca di Credito Cooperativo Colli Morenici del Garda Società Cooperativa; Banca Cremasca et Mantovana - Credito Sooperativo - Società Cooperativa; CREDITO PADANO BANCA DI CREDITO COOPERATIVO Società Cooperativa; Banca di Credito Cooperativo die Colli Albani S.C.; Banca del Cilento di Sassano e Vallo di Diano e della Luciana C.C.; CHIANTIBANCA Credito COOPERATIVO - Società Cooperativa; Banca Centropadana Credito Cooperativo; CREDITO COOPERATIVO DI CARAVAGGIO ADDA E CREMASCO - CASSA RURALE - SCOCIETÀ COOPERATIVA; Banca di Credito Cooperative di Busto Garolfo e Buguggiate sc; CASSA RURALE ED ARTIGIANADI BINASCO - CREDITO COOPERATIVO Società Cooperativa; Banca per lo Sviluppo della Cooperazione di Credito S.p.A.; Banca Alta Toscana Credito Cooperativo S.C.; Banca di Credito Cooperative di Alba, Langhe, Roero e del Canavese società cooperativa; Banca di Credito Cooperative di Alba, Langhe, Roero e del Canavese società cooperativa). Secured loans are backed by residential (39.3% of indexed property valuations) and non-residential (60.7%) properties that are highly concentrated in the non-metropolitan areas in Italy’s north (70.5%) and centre (15.7%). The issuer acquired the portfolio at the transfer date, 25 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 the cumulative amounts collected are around 10% below the level indicated in the servicer’s business plan or the present value cumulative profitability ratio falls below 90%. 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 as highlighted in the section ‘quantitative analysis and key assumptions’.

_¹ The link was added on 12 July 2018.

Rating rationale

The ratings are mainly driven by the recovery amounts and timing from the NPL portfolio. 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: the 23 aforementioned originators, regarding representation and warranties, and the eventual payments to be made by the borrowers; ii) Prelios Credit Servicing S.p.A., the servicer, iii) Securitisation Services S.p.A., the back-up servicer, corporate services provider, calculation agent, and noteholders’ representative; iv) Zenith Services S.p.A., the monitoring agent; v) BNP Paribas Securities Services (Milan Branch), the issuer’s account bank, agent bank, cash manager, and paying agent; vi) J.P. Morgan AG, the cap counterparty; and vii) Iccrea Banca S.p.A., provider of the limited-recourse loan. In Scope’s view, none of these exposures limits the maximum ratings achievable by the transaction.

Scope has applied a specific analysis to recoveries and differentiated its approach 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 as of 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 3.8 years as of closing.
 

Key rating drivers

Loan types (positive). The share of first-lien secured loans in the portfolio is high compared to peer transactions rated by Scope. First-line secured loans have higher average recovery rates.

Location (positive). The portfolio is concentrated in the non-metropolitan areas of northern and central Italy. 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 5.0% of the total outstanding balance of class A notes 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 the 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.

Hedging structure (negative). The hedging structure has relatively high strike levels, as a result the benefit of hedging will only occur after Euribor increases sharply above current forward curve levels. In Scope’s opinion, the benefit from the swap payments is offset by the upfront swap costs paid senior for the special purpose vehicle.

Backloaded recoveries (negative). Scope’s applied recovery vector shows a weighted average life of 7.8 years, which is relatively high compared to peer transactions rated by Scope. The longer timing of recovery proceeds is due mainly to the high share of loans either in bankruptcy, with no ongoing proceedings, or with proceedings in the initial stage.

High share of loans in bankruptcy or with no proceedings (negative). Almost 63% of the portfolio’s gross book value corresponds to loans either in bankruptcy or with no ongoing proceedings. Compared with non-bankruptcy proceedings, bankruptcies typically result in lower recoveries and take longer to be resolved.

Seasoned unsecured portfolio (negative). The weighted average time since default is approximately 3.8 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.

Rating-change drivers

Legal costs (positive). 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 (positive). 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 according to the servicer’s business plan. This is about 41 months faster than the recovery timing vector applied in Scope’s analysis. Scope expects recent legal reforms to have a positive impact on court performance and has applied a limited stress on recovery timing assumptions.

Fragile economic growth (negative). 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 reforms, raise spending, and cut taxes.

Interest rate cap (negative). An interest rate cap, with a strike schedule increasing from 0.5% as of closing to 2.5% from December 2026, together with a cap on the notes of 2.5% starting from December 2022 and increasing to 3.5% from June 2029, 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 has analysed cash flow, incorporating the transaction’s structural features, 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 using information on 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 1,009m in gross book value, by deducting the gross book value associated with cash already collected and cash in court (where the latter is assumed to be received with a one-year delay). All stratifications in this rating announcement include these adjustments.

For the class A analysis and taking into account the adjusted pool, Scope has assumed a gross recovery rate of 40.7% over a weighted average life of 7.8 years (excluding collections already received). By portfolio segment, Scope has assumed a gross recovery rate of 51.8% and 13.8% for the secured and unsecured portfolios, respectively. Scope has applied an average combined security value haircut of 34.8% which consists of i) an average fire-sale discount (including valuation type haircuts) of 29.9% to security valuations, reflecting liquidity or marketability risks, and ii) moderate property price decline stresses (4.7% on average), reflecting Scope’s view of downside market volatility risk.

For the class B analysis and taking into account the adjusted pool, Scope has assumed a gross recovery rate of 45.1% over a weighted average life of 7.2 years. By portfolio segment, Scope has assumed a gross recovery rate of 57.3% and 15.6% for the secured and unsecured portfolios, respectively.

Scope has captured idiosyncratic risk by applying rating-conditional recovery rate haircuts to the 10 largest borrowers, ranging from 1.7% for the analysis of the class B notes to 8.3% for the analysis of the class A notes.

Stress testing

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

Cash flow analysis

Scope has analysed the cash flow vectors from the assets and taken into account the transaction’s main structural features, such as the notes’ priorities of payments, note size, the coupon on the notes, hedging, senior costs, as well as fixed and collections-based servicing fees. This analysis produces an expected loss and 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 and recovery timing.
For class A, the following shows how the results change compared to the assigned credit rating in the event of:

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

For class B, the following shows how the results change compared to the assigned credit rating in the event of:

• a decrease in secured and unsecured recovery rates by 5%, zero notches.
• an increase in the recovery lag by one year, zero notches.

Methodology

The methodologies applied for this rating are the General Structured Finance Methodology and the Methodology for Counterparty Risk in Structured Finance. All documents are available on www.scoperatings.com. More detail regarding Scope’s approach can be found above under the sections ‘rating rationale’ and ‘quantitative analysis and key assumptions’.

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.

Scope analysts are available to discuss all 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 has no impact on the credit rating.

Prior to the issuance of the ratings, the rated entity was given the opportunity to review the ratings and the principal grounds on which it is based. Following that review, the ratings were 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 ratings: Guillaume Jolivet, Managing Director
The ratings were first released by Scope on 10 July 2018
The ratings 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. 

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