The rating actions are as follows:

Class A (ISIN IT0005340614), EUR 136,000,000: assigned a final rating of BBB+_SF

Class B (ISIN IT0005340622), EUR 26,000,000: not rated

Class J (ISIN IT0005340630), EUR 1,928,354: not rated

For the detailed research report please click HERE.¹

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 957m by gross book value. The pool comprises both secured (30.4%) and unsecured (69.6%) 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 (96.6%) and individuals (3.4%) and were originated by Banca Nazionale del Lavoro S.p.A. Secured loans are backed by residential (29.2% of indexed property valuations) and non-residential (70.8%) properties that are concentrated in the non-metropolitan areas in Italy’s north (35.3%) and centre (16.4%) as well as in Rome (12.1%). The issuer acquired the portfolio at the transfer date, 18 July 2018, but is entitled to all portfolio collections received since 1 April 2018 (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 (up to 8%) ranks senior to class A principal at closing, but will be subordinated if i) cumulative amounts collected are around 15% below the level indicated in the servicer’s business plan, or ii) the present value cumulative profitability ratio falls below 85%. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes.

Asset information reflects aggregation by loan 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 rating is mainly driven by the recovery amounts and timing from the asset in the 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 rating is also supported by the structural protection provided to the notes, the absence of equity leakage provisions and an interest rate hedging agreement, and on the other hand constrained by the relatively limited liquidity protection available to the class A notes.

The rating also addresses exposures to the key transaction counterparties: i) Banca Nazionale del Lavoro S.p.A., regarding representations and warranties, and eventual payments to be made by the borrowers and provider of the limited-recourse loan; ii) Prelios Credit Servicing S.p.A., the servicer; iii) Securitisation Services S.p.A., the back-up servicer, corporate services provider, calculation agent, noteholders’ representative and monitoring agent; iv) BNP Paribas Securities Services (Milan Branch), the issuer’s account bank, agent bank, cash manager, and principal paying agent and v) BNP Paribas, the cap counterparty. In order to assess counterparty risks Scope has taken into account its rating on BNP Paribas (AA-/S1) the parent company of BNP Paris Securities Services and Banca Nazionale del Lavoro S.p.A. as well as publicly available ratings. In Scope’s view, none of the above exposures limits the maximum ratings achievable by this 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 has 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 4.1 years as of closing.

Key rating drivers

High credit enhancement level (positive). The 85.8% credit enhancement to the class A is significantly higher than for peer transactions, providing extra protection for these notes.

Geographically diversified pool (positive). The portfolio is well distributed among Italian regions, with some concentration in the north. The north of Italy benefits from the country’s most dynamic economic conditions and, in general, the most efficient tribunals.

High portion of proceedings in advanced stages (positive). Around 30.8% of the secured loans are in the auction phase and 2.5% in the court distribution phase, which reduces the expected time for collections compared with loans in the initial phases of legal proceedings.

Valuation types (positive). Bank appraisals represent the majority of the valuations. The appraisals for properties worth more than EUR 300,000 were conducted mostly as drive-by valuations, which, in Scope’s view, are generally more accurate than common bank appraisals performed via desktop.

Class A notes’ liquidity protection (negative). The cash reserve, which is 4% of the balance of outstanding class A notes, covers the tranche’s senior expenses, legal costs and Class A notes’ interest for about 2.5 payment dates as of closing. This is low compared to peer transactions.

Low portfolio credit quality (negative). The portfolio is composed of a large proportion of low credit quality features compared to peer transactions rated by Scope considering the greater relative portion of SMEs, corporates, unsecured loans and bankrupt borrowers, as well as the lower share of residential assets. All four factors have historically led to lower recovery rates on average.

Low granularity (negative). The concentration in the portfolio, in terms of borrowers and loan amount per borrower, is very high compared to peer transactions rated by Scope, exposing the transaction to idiosyncratic risks.

Seasoned unsecured portfolio (negative). The weighted average time since loan default is approximately 4.1 years for the unsecured portion. Most unsecured recoveries are realised in the first years after a default according to historical data.

Rating-change drivers

Servicer unsecured recovery outperformance (positive). Consistent servicer outperformance in terms of unsecured recoveries could positively impact the rating. According to the servicer’s business plan, the unsecured portfolio’s collections are expected to be 7.8% of its gross book value, which is low compared to peer transactions.

Higher-than-expected legal costs (negative). An increase in legal expenses could negatively affect the rating. Scope has factored in the legal expenses for collections detailed in the servicer’s business plan, which average about 4.2% of gross collections and are low compared to peer transactions.

Collateral appraisal values (negative). An upward bias of appraisal values beyond the liquidity stresses captured by Scope could result in a rating downgrade. NPL collateral appraisals are more uncertain than standard appraisals because repossessed assets are more likely to deteriorate in value.

Quantitative analysis and key assumptions

Scope has analysed the transaction’s cash flows, incorporating its 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 i) collections already received, ii) cash in court to be received, capped at the servicer’s expected recoveries, and iii) unsecured loans granted to foreign borrowers. Collateral connected with these positions has also been removed. Overall, Scope’s adjustments have reduced the pool to EUR 880.8m in gross book value, by deducting the gross book value associated with cash already collected and cash in court. Scope assumed cash in court to be received with a one-year delay). All stratifications in this rating announcement include these adjustments.
To analyse the class A, Scope has taken into account the adjusted pool and has assumed a gross recovery rate of 23.4% over a weighted average life of 4.8 years. By portfolio segment, Scope has assumed gross recovery rates of 54.8% and 9.7% for the secured and unsecured portfolios, respectively reflecting rating-conditional haircuts. Scope has also applied an average combined security value haircut of 38.8%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 28.6% to security valuations, reflecting liquidity or marketability risks, and ii) moderate property price decline stresses (10.3% on average), reflecting Scope’s view of downside market volatility risk. The recovery rate assumption for the unsecured loans incorporates 14.7% rating conditional haircut.
Scope has captured idiosyncratic risk by applying rating-conditional recovery rate haircuts of 11.7% to the 10 largest borrower exposures.

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 has tested the resilience of the rating against deviations from expected recovery rates and recovery timing. This analysis has the sole purpose of illustrating the sensitivity of the rating 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 negatively 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 two years, zero notches.

Methodology

The methodologies applied for this rating are the General Structured Finance Methodology and the Methodology for Counterparty Risk in Structured Finance. On 25 July 2018, Scope published a dedicated methodology to analyse non-performing loans ABS – the proposal is available on www.scoperatings.com. Scope does not expect that this proposal, under its current, form shall affect the rating assigned to the class A of Juno 1 S.R.L.

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 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: Florent Albert, Associate Director
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The rating was first released by Scope on 26 July 2018.
The rating concerns 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.

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