The rating actions are as follows:

Class A (ISIN IT0005357360), EUR 320,000,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005357386), EUR 70,000,000: not rated

Class J (ISIN IT0005357394), EUR 95,000,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 2,541m by gross book value. The portfolio was initially purchased from various Italian banks by several special purpose vehicles managed by Bayview Italia S.r.l and then sold through this transaction to the issuer, Belvedere SPV S.r.l.

The pool is composed of both secured (41%) and unsecured (59%) loans; the proportions indicated are based on Scope’s adjusted pool balance, as explained in the ‘quantitative analysis and key assumptions’ section below. The loans were extended to companies (88%) and individuals (12%). Secured loans are backed by residential and non-residential properties (54.4% and 45.6% of the property value, respectively) in Italy, with some concentration in the north (48.8%) and the rest in the south (27.6%) and centre (23.6%). The issuer acquired the portfolio at the transfer date (11 December 2018), but is entitled to all collections received from the cut-off date (28 February 2018).

The capital 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 rank junior to class A principal. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes.

The class A will bear interest based on six-month Euribor, plus a margin of 3.25%. The six-month Euribor rate applicable to the class A will be partially hedged through an interest rate cap agreement with a cap strike of 0.5% as of closing, under which the SPV receives the difference between six-month Euribor and the cap, following a predefined notional schedule.¹

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.

Interest rate risk is mitigated by a hedging structure, which caps the six-month Euribor rate at 0.5% over a pre-defined notional balance. The swap notional schedule however does not fully hedge the expected class A amortisation profile under Scope’s class A analysis.

The ratings also address exposures to the key transaction counterparties: i) Bayview Global Opportunities Fund S.C.S. SICAV-RAIF, regarding representations and warranties; ii) Prelios Credit Servicing S.p.A. as master servicer and special servicer; iii) Bayview Italia S.r.l. as special servicer; iv) Securitisation Services S.p.A. as back-up master servicer, noteholders’ representative, and calculation agent; v) BNP Paribas Securities Services as account bank, paying agent, cash manager and agent bank; vi) Zenith Service S.p.A. as monitoring agent and corporate servicer; and vii) JP Morgan AG and BNP Paribas as the interest rate cap providers. Scope considered counterparty replacement triggers on the account bank and cap providers, and relied on publicly available ratings on JP Morgan and Scope’s rating of BNP Paribas SA (AA-/S-1+), the parent of BNP Paribas Securities Services.

Key rating drivers

Significant credit enhancement level (positive). The 87.6% credit enhancement to the class A is significantly higher than for peer transactions, providing extra protection for these notes.

Class A turbo amoritsation (positive). The principal on class A is paid before interest on the subordinated classes. This feature is active from the transaction inception and not dependent on class B subordination triggers as often the case in peer transactions.

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.

Material portion of proceedings in advanced stages (positive). Around 38% of the secured loans are in the auction phase and 9% in the court distribution phase. This results in a lower expected time for collections than for loans in the initial phases of legal proceedings.

Liquidity protection (negative). A cash reserve equal to 4.0% of the class A notes provides liquidity protection to senior noteholders, covering senior expenses and interest on the class A notes for about only two payment dates, as of closing. This is partially mitigated by the possibility, as foreseen by the documentation, to inject additional liquidity through a liquidity facility to avoid an event of default arising from the non-payment of interest on the class A notes.

Seasoned unsecured portfolio (negative). The weighted average time since loan default is approximately 9.2 years for the unsecured portion, which is significantly longer than for most Italian NPL securitisations. Most unsecured recoveries are realised in the first years after a default, according to historical data.

Share of loans with no proceedings or in bankruptcy (negative). A material share of the portfolio’s gross book value corresponds to loans with no proceedings (50.4%) or in bankruptcy (33%). Scope has assumed loans with no proceeding to enter bankruptcy if connected to a corporate (49.2%) or foreclosure if connected to an individual (1.2%). Compared with non-bankruptcy proceedings, bankruptcies typically result in lower recoveries and take longer to be resolved.

Rating-change drivers

Legal costs (upside). Scope factored in legal expenses for collections at a level in line with the average peer transaction. A decrease in legal expenses could positively affect the ratings.

Servicer outperformance (upside). Consistent servicer outperformance in terms of recovery timing and the total amount of collections could positively impact the ratings. Portfolio collections will be completed over a weighted average period of 3.9 years, according to the servicer business plan. This is about 30 months faster than the recovery weighted timing vector applied in the analysis.

Servicer underperformance (downside). Servicer performance which falls short of Scope’s base case collection amounts and timing assumptions could negatively impact the ratings.

Fragile economic growth (downside). 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.

Quantitative analysis and key assumptions

Scope analysed the cash flow to the transaction to reflect its structural features and calculate each tranche’s expected loss and weighted average. 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 recoveries, using different approaches for 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, while 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 considered the special servicers’ capabilities when calibrating lifetime recoveries, also considering that unsecured borrowers were classified as defaulted for a weighted average of 9.2 years as of the 28 February 2018 cut-off date.

Scope adjusted the pool’s gross book value using information on collections and sold properties since the 28 February 2018 cut-off date. The analysis excluded portfolio loans which Scope assumed to be closed, based on collections already received and cash-in-court to be received. Collateral connected with these positions was also removed.

The adjustments reduced the portfolio’s gross book value from EUR 2,541m to EUR 2,467m. Collections received since the cut-off date are assumed to be cash available at closing, while cash-in-court is assumed to be received no earlier than one year after the closing date.

For the analysis of the class A notes, Scope assumed a gross recovery rate of 19.4% over a weighted average life of 6.4 years. By segment, Scope assumed a gross recovery rate of 36.7% for the secured portfolio and 7.3% for the unsecured portfolio. Scope has applied an average combined security value haircut of 31.3%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 25.6% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (7.7% 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.
Scope captured single asset exposure risks by applying a recovery rate haircut of 10% to the 10 largest borrowers in class A analysis.

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, note size and coupon, hedging and senior costs as well as fixed and performance-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. 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.

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: two notches.
• an increase in the recovery lag by one year, negative: one 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.
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 Martin Hartmann, Associate Director.
Person responsible for approval of the ratings: Guillaume Jolivet, Managing Director .
The ratings were first released by Scope on 21.12.2018.
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.

¹Editor's Note
The sentence was changed on 8 January 2019. Compared to the original publication on 21. December 2018, the content was not changed but is now easier to understand for the reader.

Conditions of use / exclusion of liability
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