The rating actions are as follows:

Class A (ISIN IT0005342891), EUR 85,000,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005342909), EUR 9,000,000: assigned a final rating of B_SF

Class J (ISIN IT0005342917), EUR 3,500,000: not rated

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 349m by gross book value. The pool is comprised of both secured (67.2%) and unsecured (32.8%) loans; the proportions indicated are based on Scope’s adjusted pool balance, explained below in the ‘quantitative analysis and key assumptions’ section. The loans were extended to companies (74.4%) and individuals (25.6%) and were originated by Banca Agricola Popolare di Ragusa S.C.p.A. Secured loans are backed by residential and non-residential properties (57.8% and 42.2% of property value, respectively). Almost all properties are located on the island of Sicily. The issuer acquired the portfolio on the transfer date, 9 August 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 margin ranks senior to class A principal at closing, but will be subordinated if the cumulative amounts collected are around 15% below the level indicated in the servicer’s business plan, or if the present value cumulative profitability ratio falls below 85%. The class B base rate is permanently subordinated to class A principal. 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 ‘quantitative analysis and key assumptions’ section.

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: i) Italfondiario S.p.A., the servicer; ii) Securitisation Services S.p.A., the back-up servicer, corporate services provider, calculation agent, and representative of the noteholders; iii) Zenith Services S.p.A., the monitoring agent; iv) BNP Paribas Securities Services (Milan Branch), the issuer’s account bank, agent bank, cash manager, and paying agent; v) Banca IMI S.p.A., the cap counterparty; and vi) Banca Agricola Popolare di Ragusa S.C.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 performed a specific analysis for recoveries and adopted an approach which differentiated between secured and unsecured exposures. For secured exposures, collections 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 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 5.5 years as of closing.

Key rating drivers

High credit enhancement level (positive). The 75.6% credit enhancement level for the class A is high relative to several peer transactions, providing extra protection for these notes.

Loan type (positive). The share of first-lien secured loans in the portfolio (67.2%) is high compared to peer transactions rated by Scope. First-lien secured loans have higher average recovery rates than other type of loans.

Low share of bankruptcy proceedings (positive). The portfolio share of bankrupt exposures – 13.2% – is low compared to peer-rated NPL transactions. Bankruptcy proceedings typically result in lower recoveries and can take longer to resolve than non-bankruptcy resolutions methods.

Residential collateral (positive). Approximately 57.8% of the secured collateral consists of residential real estate, which is typically more liquid than commercial, industrial and land property-types, and usually does not experience the same level of discounts and lengthy liquidation timelines.

Liquidity protection (positive). The cash reserve, which is 7.5% of the outstanding class A notes balance, covers the transaction’s senior expenses, legal costs and class A notes’ interest for about 4.6 payment dates as of closing. This coverage is high compared to peer transactions.

Geographic concentration (negative). Most of the portfolio is concentrated in eastern Sicily. This lack of geographical diversification exposes the transaction to specific local risks. These risks include the possible weak performance of the economy and its impact on property prices, slow court resolution timelines, and the impact of seismic activity, all of which potentially affect the realisation of value of the properties securing the loans. Exposure to seismic events is partially mitigated by insurance.

Pool audit (negative). The pool audit reported more errors than are normally seen in peer transactions. This is partially mitigated by the servicer’s commitment to examine all loans within the indemnity period and report any eventual breach of representations and warranties.

Seasoned unsecured portfolio (negative). The weighted average time since default is approximately 5.5 years for the unsecured portion. Most unsecured recoveries are realised in the first years after a default according to historical data.

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 4.4 years according to the servicer’s business plan. This is about 52.8 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 to 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 0.1% as of closing to 2.0% in April 2028, 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 analysed cash flows that incorporate the transaction’s structural features in order to calculate the expected loss and weighted average life for each tranche. As a first step, Scope analysed the assets to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of non-performing loans.

Scope adjusted the pool’s gross book value using information on collections and sold properties. Specifically, the analysis excluded portfolio loans that the agency 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 reduced the pool to EUR 329.7m in gross book value. This was done 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, taking into account the adjusted pool, Scope assumed a gross recovery rate of 42.1% over a weighted average life of 8.7 years (excluding collections already received). By portfolio segment, Scope assumed a gross recovery rate of 55.3% and 12.4% for the secured and unsecured portfolios, respectively. Scope applied an average combined security value haircut of 41.8% which consists of an average fire-sale discount (including valuation type haircuts) of 24.4% to security valuations, reflecting liquidity or marketability risks. Scope’s assumptions reflect: i) a deal-specific market value decline component of 17.4% for class A, capturing the increased risk exposure to geographic concentration in Sicily; and ii) a 15% value haircut applied to properties subject to non-standard valuation methods on secured assets accounting for about 3.1% of secured loans valuations.

For the class B analysis and taking into account the adjusted pool, Scope assumed a gross recovery rate of 52.7% over a weighted average life of 8.1 years. By portfolio segment, Scope assumed a gross recovery rate of 69.5% and 15.0% for the secured and unsecured portfolios, respectively.

Scope captured single asset exposure risks by applying to the 10 largest borrowers a rating-conditional recovery rate haircut of 0% for the analysis of the class B notes and 10.0% for the analysis of the class A notes.
Scope incorporated an additional two-year recovery lag in its analysis of the rated notes, reflecting the high exposure to a limited number of tribunals and the outcome of the third-party asset audit. After this adjustment, Scope’s applied recovery vector has a weighted average life of 8.7 years for the class A notes, which is relatively high compared to peer transactions rated by Scope.

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 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%, one notch.
• an increase in the recovery lag by one year, one notch.

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 10%, zero notches.
• an increase in the recovery lag by one years, one notch.

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 ratings assigned to Class A or Class B of Ibla S.r.l. All documents are available on www.scoperatings.com. More details regarding Scope’s approach can be found above in the ‘rating rationale’ and ‘quantitative analysis and key assumptions’ sections.

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 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 Thomas Miller-Jones, Associate Director
Person responsible for approval of the ratings: Guillaume Jolivet, Managing Director
The ratings were first released by Scope on 6 September 2018
The ratings concern a financial instrument, which has been rated by Scope for the first time.

Potencial 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.