The rating actions are as follows:

Class A (ISIN IT0005356925), EUR 478,000,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005356933), EUR 60,129,000: assigned a final rating of B+_SF

Class J (ISIN IT0005356941), EUR 20,043,080: not rated

Transaction overview

The transaction is a cash securitisation of a static Italian non-performing loan (NPL) multi-originator portfolio of EUR 2,004m by gross book value.

The portfolio was originated by 73 Italian cooperative banks (as reported in the appendix of the press release). The portfolio will be serviced by Italfondiario S.p.A. as special and master servicer.

The pool comprises both secured (58.4%) and unsecured (41.6%) loans. The loans were extended to companies (79.1%) and individuals (20.9%). Secured loans are backed by residential and non-residential properties (36.9% and 63.1% of the property value respectively) that are rather concentrated in the centre of Italy (47.5%) and the north of Italy (34.1%). The issuer acquired the portfolio at the transfer date of 7 December 2018. Asset information reflects aggregation by loans and Scope’s pool adjustments, as highlighted in the section ‘quantitative analysis and key assumptions’.

A reputable auditing firm performed an audit on a sample of loans from the securitised portfolio. However, due to a standard selection performed on a random basis, the audited sample only includes loans from around three fourth of the sellers.

The structure comprises three classes of notes with fully sequential principal amortisation. Class B interest payments rank senior to class A principal. Class B interests will be subordinated to class A principal repayment if the cumulative amount of collections is at least 20% below the level indicated in the servicer’s business plan or if the present value cumulative profitability ratio falls below 80%. 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. Hedging arrangements mitigate interest rate risk, as detailed below.

The transaction may involve the presence of a Real Estate Operating Company.

Rating rationale

The ratings are primarily driven by the expected recovery amounts and by the timing of collections from the NPL portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics, Scope’s economic outlook for Italy, and the assessment of the special servicers’ capabilities. The ratings consider the structural protection provided to the notes, the absence of equity leakage provisions, the liquidity protection provided by the cash reserve, and the interest rate hedging agreements.

The ratings also address the exposure to the key transaction counterparties: (i) Italfondiario S.p.A. as master servicer and special servicer; (ii) Securitisation Servicers S.p.A. as back-up master servicer, noteholders’ representative, calculation agent and corporate servicer; (iii) BNP Paribas Securities Services as account bank, paying agent, cash manager and agent bank; (iv) Zenith Service S.p.A. as monitoring agent; and (v) UniCredit Bank AG and JP Morgan AG as the interest rate caps providers. Scope considered the counterparty replacement triggers implemented in the transaction and relied on publicly available ratings on JP Morgan AG, and on Scope’s rating of BNP Paribas SA (AA-/S-1+), the parent of BNP Paribas Securities Services and of UniCredit Bank AG (A/S-1).

One originator, Banca di Credito Cooperativo di Cittanova - Società Cooperativa, is currently reported as under extraordinary administration procedure. Assets from this originator however represent a gross book value of only EUR17.8m and therefore the expected recoveries are limited. The negative impact on the rated instruments following a possible claw-back risk for the issuer on this proportion of the portfolio has been considered in the quantitative analysis.

Key rating drivers

Borrowers granularity (positive). The portfolio is relatively granular compared to peer NPL transactions rated by Scope (average debtors’ exposure of EUR 194,000). Top 10 debtors’ exposure is lower than comparable NPL transactions, accounting for 3.8% of the portfolio gross book value.

Unsecured portfolio seasoning (positive). The weighted average seasoning of the unsecured portfolio is moderately short (2.5 yrs) in comparison with other peer NPL transactions rated by Scope.

Diversified geographical distribution of the collateral and multi-originator nature of the transaction (positive). The portfolio collateral is relatively highly diversified in terms of geographical distribution. Almost 82% of the portfolio is distributed among the northern and central regions of Italy (34.1% and 47.5% respectively), which usually benefit from relatively low court timings compared to sourthern regions. The multi-originator nature of the transaction countributes to mitigate the risk of concentration in terms of properties’ location and borrowers’ exposures.

Hedging structure (negative). The interest risk on class A notes is mitigated through a hedging structure, which caps the six-month Euribor at 1% over a pre-defined notional balance. The interest rate risk related to class B notes is mitigated by a six-month Euribor cap, increasing from 1% to 5% over a pre-defined notional balance. However, interest rate risk coverage only starts from July 2020 and the notional schedules, especially for the cap covering class B, do not fully match Scope’s expected notes amortisation profile.

Property type (negative). The residential component of the portfolio (37% of total properties’ valuation) is relatively low compared to peer transactions rated by Scope. The proportion of land property is higher than other peer transactions (18% of total properties’ valuations), which however includes a majority of agricultural land whose price volatility upon liquidation may be limited.

High share of loans in bankruptcy or with no proceedings (negative). Scope expects a weighted average recovery timing of 6.9 years, which is long compared to peer transactions rated by Scope. The longer timing for recovery proceeds is mainly due to the almost 60% of the portfolio’s gross book value corresponding 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 (upside). 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 compared to Scope’s initial expectations could positively affect the ratings. 

Servicer outperformance regarding recovery timing (upside). 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 25 months faster than the recovery weighted timing vector applied in Scope’s analysis.

Servicer underperformance (downside). Servicer performance below 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 mediumterm growth potential of 0.75%, alongside the lack of a coherent reform agenda.

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 cutoff date. For unsecured exposures, Scope used historical, line-by-line recovery data on defaulted loans between 1995 and 2017. Historical data has been used to calibrate recoveries, considering unsecured borrowers to be classified as defaulted for a weighted average of 2.5 years as of closing. Scope also analysed historical data provided by the servicer.

Scope has adjusted the pool’s gross book value using information on collections and sold properties. Specifically, the analysis has excluded from the portfolio those 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 1,954m in gross book value, by deducting the gross book value related to those loans which have been partially or totally recovered, following the receipt of the ad-interim collections or the presence of cash in court amounts.

For the analysis of the class A notes, Scope assumed a gross recovery rate of 38.8% over a weighted average life of 6.9 years. By segment, Scope assumed a gross recovery rate of 55.6% for the secured portfolio and of 15.3% for the unsecured portfolio. Scope has applied an average combined security value haircut of 40.0% which consists of i) an average fire-sale discount (including valuation type haircuts) of 34.3% to security valuations, reflecting liquidity or marketability risks, and ii) property price decline stresses (8.7% 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’s 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 43.8% over a weighted average life of 6.1 years. By portfolio segment, Scope has assumed a gross recovery rate of 62.5% and 17.7% 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, transaction’s senior costs, and both collections based and fixed 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 ratings to input assumptions and it 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: 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: less than 2 notches.

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: Rossella Ghidoni, Associate Director.
Person responsible for approval of the ratings: Guillaume Jolivet, Managing Director .
The ratings were first released by Scope on 20.12.2018.
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.

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

Originators

Banca Alta Toscana Credito Cooperativo – Società Cooperativa
Banca Cremasca e Mantovana – Credito Cooperativo – Società Cooperativa
Banca del Cilento di Sassano e Vallo di Diano e della Lucania - Credito Cooperativo Soc. Coop.
Banca del Piceno Credito Cooperativo – Società Cooperativa
Banca del Valdarno Credito Cooperativo – Società Cooperativa
Banca di Ancona e Falconara Marittima Credito Cooperativo – Società Cooperativa
Banca di Credito Cooperativo “G. Toniolo” di San Cataldo (Caltanissetta) – Società Cooperativa
Banca di Credito Cooperativo “San Giuseppe” di Mussomeli
Banca di Credito Cooperativo Agrigentino – Società Cooperativa
Banca di Credito Cooperativo Bergamo e Valli SC
Banca di Credito Cooperativo Brianza e Laghi Soc. Coop.
Banca di Credito Cooperativo degli Ulivi – Terra di Bari S.C.
Banca di Credito Cooperativo dei Colli Albani – Società Cooperativa
Banca di Credito Cooperativo del Metauro Società Cooperativa
Banca di Credito Cooperativo della Valle del Trigno – Società Cooperativa
Banca di Credito Cooperativo dell’Adriatico Teramano – Società Cooperativa
Banca di Credito Cooperativo dell’Oglio e del Serio
Banca di Credito Cooperativo di Alba Langhe Roero e del Canavese
Banca di Credito Cooperativo di Altofonte e Caccamo – Società Cooperativa
ICCREA BancaImpresa S.P.A.
Banca di Credito Cooperativo di Buccino e dei Comuni Cilentani – Società Cooperativa
Banca di Credito Cooperativo di Busto Garolfo e Buguggiate
Banca di Credito Cooperativo di Canosa Loconia
Banca di Credito Cooperativo di Capaccio Paestum Società Cooperativa
Banca di Credito Cooperativo di Castiglione Messer Raimondo e Pianella S.C.P.A.R.L.
Banca di Credito Cooperativo di Cittanova – Società Cooperativa
Banca di Credito Cooperativo di Fano Società Cooperativa
Banca di Credito Cooperativo di Gambatesa – Società Cooperativa
Banca di Credito Cooperativo di Marina di Ginosa Soc. Coop.
Banca di Credito Cooperativo di Ostra e Morro d’Alba – Società Cooperativa
Banca di Credito Cooperativo di Ostra Vetere Soc. Coop.
Banca di Credito Cooperativo di Ostuni
Banca di Credito Cooperativo di Pachino
Banca di Credito Cooperativo di Pergola e Corinaldo Società Cooperativa
Banca di Credito Cooperativo di Recanati e Colmurano S.C.
Banca di Credito Cooperativo di Riano Soc. Coop.va
Banca di Credito Cooperativo di San Biagio Platani – Società Cooperativa
Banca di Credito Cooperativo di San Marco dei Cavoti e del Sannio – Calvi Società Cooperativa
Banca di Credito Cooperativo di Scafati e Cetara Società Cooperativa
Banca di Credito Cooperativo di Serino Società Cooperativa
Banca di Credito Cooperativo di Spinazzola Soc.Coop. a.r.l.
Banca di Credito Cooperativo di Venezia Padova e Rovigo – Banca Annia – Società Cooperativa
Banca di Credito Cooperativo San Michele di Caltanissetta e Pietraperzia Società Cooperativa
Banca di Credito Cooperativo di Valle del Torto Società Cooperativa
Banca di Filottrano Credito Cooperativo di Filottrano e Camerano Società Cooperativa
Banca di Formello e Trevignano Romano di Credito Cooperativo
Banca di Monastier e del Sile – Credito Cooperativo
Banca di Pesaro Credito Cooperativo – Società Cooperativa
Banca di Pescia e Cascina – Credito Cooperativo – Società Cooperativa
Banca di Ripatransone e del Fermano CR. Coop. S.C.
Banca per lo Sviluppo della Cooperazione di Credito S.p.A.
Banca San Francesco Credito Cooperativo – Società Cooperativa
Banca Valdichiana – Credito Cooperativo di Chiusi e Montepulciano Soc. Coop.
Banca Versiliana Lunigiana e Garfagnana Credito Cooperativo Società Cooperativa
BCC Terra Di Lavoro S. Vicenzo De’ Paoli Società Cooperativa per Azioni
BCC Umbria Credito Cooperativo Società Cooperativa
Cassa Rurale Banca di Credito Cooperativo di Treviglio SC
Cassa Rurale ed Artigiana di Binasco – Credito Cooperativo S.C.
Cassa Rurale ed Artigiana di Cantù – Banca di Credito Cooperativo S.c.
Cassa Rurale ed Artigiana di Castellana Grotte Credito Cooperativo – Società Cooperativa
CentroMarca Banca Credito Cooperativo di Treviso e Venezia
CereaBanca 1897 – Credito Cooperativo – Società Cooperativa
ChiantiBanca Cred. Coop. Soc. Coop.
Credito Cooperativo di Caravaggio Adda e Cremasco – Cassa Rurale – Società Cooperativa
Credito Cooperativo di San Calogero e Maierato – BCC del Vibonese Soc. Coop.
Credito Cooperativo Mediocrati Soc. Coop. per Azioni
Credito Cooperativo Ravennate Forlivese e Imolese Soc. Coop.
Credito Cooperativo Valdarno Fiorentino Banca di Cascia Società Cooperativa
Credito Padano Banca di Credito Cooperativo Società Cooperativa
Emil Banca – Credito Cooperativo – Società Cooperativa
La BCC Del Crotonese – Credito Cooperativo – Società Cooperativa
Terre Etrusche e di Maremma Credito Cooperativo
ViVal Banca – Banca di Credito Cooperativo di Montecatini Terme and Bientina e San Pietro in Vincio s.c.