The rating actions are as follows:

Class A (ISIN IT0005351884), EUR 426,000,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005351892), EUR 50,000,000: assigned a final rating of B_SF

Class J (ISIN IT0005351900), EUR 15,780,000: not rated

The transaction is a cash securitisation of a static Italian non-performing loan (NPL) multi-originator portfolio of EUR 1,578m by gross book value.

The portfolio is originated by 17 Italian banks: La Cassa di Ravenna S.p.A., Banco di Lucca e del Tirreno S.p.A., Banca di Imola S.p.A., Credito di Romagna S.p.A., Banca Popolare del Lazio S.c.p.A., Banca di Piacenza Soc. Coop. per Azioni, Banca Popolare Pugliese S.c.p.A., Banca Popolare di Fondi S.c., Banca Popolare del Frusinate S.c.p.A., Banca Popolare del Cassinate S.c.p.A., Banca Popolare di Puglia e Basilicata S.c.p.A., Banca Popolare di Cortona S.c.p.A., SanFelice 1893 Banca Popolare S.c.p.A., Banca Popolare Valconca S.p.a., Banca Popolare Sant’Angelo S.c.p.A., Cassa di Risparmio di Orvieto S.p.A., Banca Popolare di Bari S.c.p.A. and will be serviced by Cerved Credit Managament S.p.A. and Cerved Master Services S.p.A. as special and master servicer.

The pool comprises both secured (53.9%) and unsecured (46.1%) loans. The loans are extended to companies (77.1%) and individuals (22.9%). Secured loans are backed by residential and non-residential properties (41.7% and 58.3% of the property value respectively) that are rather concentrated in non-metropolitan areas located in the south of Italy (30.6%) and centre (26.9%). The issuer acquired the portfolio at the transfer date of 31 October 2018, but it is entitled to all collections received from 31 December 2017 (the cut-off date).

The transaction may involve the presence of a Real Estate Operating Company (“ReoCo”). After closing, the ReoCo framework may be activated by the mezzanine and junior noteholders. The ReoCo would participate in the auction process, acquiring properties and re-selling them in the open market, with the aim of maximising recovery proceeds. The ReoCo would pay the auction price to the issuer only after the re-sale of the property. There would be a maximum limit to the total outstanding exposure of the issuer towards the ReoCo for unpaid purchase prices.

The structure comprises three classes of notes with fully sequential principal amortisation: senior class A, mezzanine class B, and junior class J. Class B interest payments ranking senior to class A principal are capped at 6%, while the residual interest component is fully deferred to class A principal repayment. The senior component of class B interest will be subordinated to class A principal repayment if the cumulative amount of collections is at least 10% below the level indicated in the servicer’s business plan or if 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.

The class A and class B notes will bear interest based on six-month Euribor, plus a margin of 0.3% and 6.0%, respectively. The six-month Euribor rate applicable to the class A notes will be capped, from April 2019 to April 2021 to 0.5%, until April 2023 to 1.0%, until April 2025 to 1.5%, until April 2027 to 2.0%, to 2.5% thereafter.

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

Rating rationale

The ratings are primarily driven by the expected recovery amounts and timing of collections from the NPL portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics as well as Scope’s economic outlook for Italy and assessment of the special servicers’ 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 incorporate the potential involvement of a Real Estate Operating Company, a feature which however does not materialy affect the ratings. The ratings incorporate the alignment of interests between the ReoCo and the issuer. Scope will monitor the involvement of a ReoCo entity and its operativity and its impact on the ratings over time.

The ratings also address exposures to the key transaction counterparties: Cerved Master Services S.p.A. as master servicer; Cerved Credit Management S.p.A. as special servicer; Securitisation Servicers S.p.A. as back-up master servicer, noteholders’ representative, calculation agent and corporate servicer; BNP Paribas Securities Services as account bank, paying agent, cash manager and agent bank; Zenith Service S.p.A. as monitoring agent; and JP Morgan AG as the interest rate cap provider. Scope considered counterparty replacement triggers implemented in the transaction and relied on publicly available ratings and Scope’s rating of BNP Paribas SA (AA-/S-1+), the parent of BNP Paribas Securities Services.

Key rating drivers

Borrowers type (positive). The portfolio share of individual borrowers is higher compared to peer NPL transactions rated by Scope (22.9%).

Liquidity protection (positive). A cash reserve representing 4.0% 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 six payment dates as of closing.

Hedging structure (positive). The interest risk is mitigated through the presence of a hedging structure which effectively caps the six-month Euribor at 0.1% over a pre-defined notional balance. However, the swap notional schedule does not fully hedge the expected class A amortization profile.

Pool audit (positive). The pool audit reported a low level of errors in comparison with other peer transactions. The sample has been chosen in such a way that at least some loans are audited for each bank.

Geographic concentration (negative). The portfolio is concentrated in the non-metropolitan areas of south and centre of Italy. These areas do not benefit from the most dynamic economic conditions in the country or, in general, from the most efficient tribunals.

Backloaded recoveries and high share of loans in bankruptcy or with no proceedings (negative). Scope expects a weighted average recovery timing of 6.9 years, which is relatively high compared to peer transactions rated by Scope. The longer timing for recovery proceeds is mainly due to the high share of loans either in bankruptcy, with no ongoing legal proceedings, or with legal proceedings in the initial stage. Almost 57% 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.

Rating-change drivers

Legal costs (positive). Scope has factored in a level of legal expenses for collections as specified under the ‘Quantitative analysis and key assumptions’ section. 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 4.8 years according to the servicer’s business plan. This is about 24 months faster than the recovery weighted timing vector applied in Scope’s analysis.

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.

ReoCo. The introduction of a ReoCo structure that differs significantly from what is currently proposed in the transactions documents, regarding the investment limit and ReoCo waterfall, could negatively affect the ratings.

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 performed a specific analysis for the secured and unsecured exposures. For secured exposures, collection assumptions were mostly based on up-to-date 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 recovery data on defaulted loans between 1995 and 2017 and calibrated recoveries, considering unsecured borrowers to be classified as defaulted for a weighted average of 3.5 years as of closing.

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 1,509m in gross book value, by deducting the gross book value associated with cash already collected and cash in court.

For the analysis of the class A notes, Scope assumed a gross recovery rate of 38.6% over a weighted average life of 6.9 years. By segment, Scope assumed a gross recovery rate of 61.8% for the secured portfolio and of 10.9% for the unsecured portfolio. Scope has applied an average combined security value haircut of 35.4% which consists of i) an average fire-sale discount (including valuation type haircuts) of 27.8% to security valuations, reflecting liquidity or marketability risks, and ii) property price decline stresses (10.6% on average), reflecting Scope’s view of downside market volatility risk. Scope factored in legal expenses of 9% over gross collections, in line with average peer transaction assumptions, and the servicer fee structure. Scope also took into account the cost of the interest rate cap structure.

For the analysis of the class B notes, Scope assumed a gross recovery rate of 44.4% over a weighted average life of 5.8 years. By portfolio segment, Scope has assumed a gross recovery rate of 70.7% and 13.1% 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 10% in the BBB rating scenario.

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 payment, notes size and coupon, hedging and senior costs as well as fixed and collections based servicing fees. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Rating sensitivity
Scope tested the resilience of the ratings against deviations from the main input assumptions: recovery-rate level and recovery timing.
Scope tested the resilience of the ratings against deviations from the main input assumptions also with reference to the potential involvement of a ReoCo structure.
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 10%, negative: 2 notches;
• an increase in the recovery lag by one year, negative: 1 notch.

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%, negative: 2 notches;
• an increase in the recovery lag by one year, negative: 1 notch.

Methodology
The methodology applied for this rating is the Non-Performing Loan ABS Rating Methodology. Scope also applied the principles contained in the Methodology for Counterparty Risk in Structured Finance. All documents are available on www.scoperatings.com. More detail regarding the approach applied can be found in the ‘Quantitative analysis and Key Assumptions’ section above.

Historical default rates of the entities rated by 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 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 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 ratings are issued by Scope Ratings GmbH.
Lead analyst Rossella Ghidoni, Associate Director.
Person responsible for approval of the ratings: Guillaume Jolivet, Managing Director.
The ratings were first released by Scope on 16 November 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.

Conditions of use / exclusion of liability
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