The rating actions are as follows:

Class A (ISIN IT0005341125), EUR 628,500,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005341133), EUR 60,000,000: not rated

Class J (ISIN IT0005341141), EUR 26,900,000: 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 2,749m by gross book value. The pool comprises both first lien secured (39.9%) and unsecured as well as junior lien secured (60.1%) 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 (83.0%) and individuals (17.0%) and were originated by Unione di Banche Italiane S.p.A. and IW Bank S.p.A. Secured loans are backed by residential (57.3%) and non-residential (42.7%) properties with some concentration in the north (57.9%) and centre (19.2%) of Italy. The issuer acquired the portfolio at the transfer date, 20 July 2018, but it is entitled to all portfolio collections received since 1 January 2018 (portfolio cut-off date), which amount to EUR 51.7m.

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 it will be subordinated if i) cumulative amounts collected are 10% below the level indicated in the servicer’s business plan, or ii) the present value cumulative profitability ratio falls below 90%, or iii) there is any unpaid amount on the Class A interest. Class J principal and interest are subordinated to the repayment of 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 of collections from the assets in the portfolio. Recovery and timing assumptions 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. On the other hand, the rating is constrained by the relatively limited liquidity protection for the Class A Notes.

The rating also addresses exposures to the key transaction counterparties: i) Unione di Banche Italiane S.p.A. and IW Bank S.p.A. as originators, regarding representations and warranties; ii) Unione di Banche Italiane S.p.A. as the issuer’s account bank and provider of the limited-recourse loan; iii) Prelios Credit Servicing S.p.A. as the servicer; iv) Bank of New York Mellon SA/NV, Milan Branch as the issuer’s agent bank and principal paying agent; v) Securitisation Services S.p.A. as the back-up servicer, corporate services provider, calculation agent, noteholders’ representative, and monitoring agent; and vi) Société Générale S.A. as the interest-rate cap counterparty. To assess counterparty risks Scope has considered its rating on Société Générale S.A. (A+/S1+) and publicly available ratings on Unione di Banche Italiane S.p.A. and Bank of New York Mellon SA/NV. 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, collection assumptions 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, considering that unsecured borrowers were classified as defaulted for an average of 4.6 years as of closing.

Key rating drivers

High credit enhancement level (positive). The 77.1% credit enhancement to the Class A is higher than the credit enhancement of peer transactions, providing extra protection for the notes.

Above-average collateralisation (positive). The weighted average loan-to-value of secured loans (41.8%) is significantly lower than that of peer transactions (65-85%). This increases the support provided by real estate collateral to secured loans.

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

Valuation dates (positive). Almost all collateral appraisals were made after 2016. Particularly, around 52.0% of the collateral appraisals were made in the first half of 2018.

High share of foreclosures (positive). Around 60.0% of the pool’s first-lien secured gross book value refers to borrowers under a foreclosure procedure. Compared to bankruptcy procedures, foreclosures typically result in higher collections and shorter recovery timing.

High granularity (positive). The portfolio is granular compared to peer transactions rated by Scope. The 10 and 100 largest borrower exposures account for 1.9% and 10.4% of gross book value, respectively.

Pool contains loans with unusual characteristics (negative). The collateral pool contains loans with the following unusual characteristics: i) incomplete loan documentation; ii) borrowers not residing or without an office in Italy; iii) borrowers for which only part of the exposure has been sold to the issuer (‘shared borrowers’); iv) loans for which the mortgage securing the loan is shared with an exposure still held by the seller; and v) the existence of borrowers for which bankruptcy proceedings have been closed. Scope has considered all these features in its analysis and, as a consequence, reduced the expected recoveries from the pool.

Seasoned unsecured portfolio (negative). The weighted average time since loan default is approximately 4.6 years for the unsecured portion. Most unsecured recoveries are realised in the first years after default, according to historical data.

High portion of proceedings in initial stages (negative). Around 65.0% of the secured loans are in the initial stage of legal proceedings and around 4% in the court distribution phase, which increases the expected time for collections compared to loans in the advanced phases.

Low portfolio credit quality (negative). The portfolio has a large proportion of low-credit-quality features compared to peer transactions rated by Scope, given the relatively large share of SMEs, corporates and unsecured loans. All these factors have historically led to lower recovery rates on average.

Class A notes’ liquidity protection (negative). The cash reserve, which is 4.0% of the outstanding Class A notes balance, covers the transaction’s senior expenses, legal costs and Class A notes’ interest for about 2.5 payment dates as of closing. This coverage is relatively low compared to peer transactions.

Rating-change drivers

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 3.8 years, according to the servicer’s business plan. This is about 30 months faster than the recovery timing vector applied for the analysis.

Legal costs (positive). Scope has factored in the legal expenses for collections detailed in the servicer’s business plan. A decrease in legal expenses could positively affect the rating.

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.

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). 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 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 assumed that some loans will not generate future cash flows based on the following considerations i) collections already received, ii) cash in court to be received, iii) unsecured loans granted to foreign borrowers, and iv) unsecured loans for which a bankruptcy procedure has already been closed. Collateral linked to these positions has also been removed. Overall, Scope’s adjustments have reduced the pool to EUR 2,495.7m in gross book value, by deducting the gross book value associated with the excluded loans. Scope has assumed that cash in court will be received with an 18-month delay. All stratifications in this rating announcement include these adjustments.

To analyse the Class A, Scope has considered the adjusted pool and has assumed a gross recovery rate of 35.5% over a weighted average life of 6.3 years. By portfolio segment, Scope has assumed gross recovery rates of 63.0% and 11.5% for the secured and unsecured portfolios, respectively, reflecting rating-conditional haircuts. Scope has also applied an average combined security value haircut of 37.3%, which consists of i) an average fire-sale discount (including valuation-type haircuts) of 32.0% to security valuations, reflecting liquidity or marketability risks, and ii) moderate property price decline stresses (7.8% on average), reflecting Scope’s view of downside market volatility risk. The recovery rate assumption for the unsecured loans incorporates a 16.0% rating-conditional haircut.

Scope has captured idiosyncratic risk by applying rating-conditional recovery rate haircuts of 10.0% 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 considered the transaction’s main structural features, such as the notes’ priorities of payments, the notes’ size, the coupon on the notes, hedging arrangements, 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 has 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 upon:

• 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 are the General Structured Finance Methodology and the Methodology for Counterparty Risk in Structured Finance. On 25 July 2018, Scope published a methodology dedicated to the analysis of non-performing loan ABS – the proposal is available on www.scoperatings.com. Scope does not expect the proposed methodology under its current form to affect the rating assigned to the Class A of Maior SPV 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: Leonardo Scavo, Analyst
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The rating was first released by Scope on 1 August 2018.
The rating concerns a financial instrument which has been rated by Scope for the first time.
Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director(s): Torsten Hinrichs.

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: Torsten Hinrichs.