The rating actions are as follows:

Class A (ISIN IT0005363731), EUR 204,000,000: assigned BBB+_SF

Class B (ISIN IT0005363749), EUR 48,000,000: not rated

Class J (ISIN IT0005363756), EUR 12,754,736: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 968m by gross book value. The portfolio was originated by Banca Nazionale del Lavoro S.p.A. (BNL). The pool is composed of both senior secured (57.7%) and unsecured (42.3%) loans (including junior secured loans). The loans were extended to companies (92.3%) and individuals (7.7%). Secured loans are backed by first-lien residential and non-residential properties (34.8% and 65.2% of property values, respectively) in Italy, equally distributed in the north (32.8%), centre (38.9%), and south (28.3%). The issuer acquired the portfolio as at the transfer date (30 January 2019) but is entitled to all collections received from the cut-off date (30 September 2018). Asset information reflects aggregation by loans.

The structure comprises three classes of notes with fully sequential principal amortisation: senior class A, mezzanine class B, and junior class J. The class A and B will pay a floating rate based on six-month Euribor, plus a margin of 0.6% and 8%, respectively. A portion of class B interest capped at 8% ranks senior to class A principal at closing but will be deferred if special servicer performance triggers are breached. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes.

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 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) BNL, regarding representations and warranties and the eventual payments to be made by the borrowers; ii) Prelios Credit Servicing S.p.A. as servicer; iii) Securitisation Services S.p.A. as back-up servicer, monitoring agent, noteholders’ representative, calculation agent and corporate servicer; iv) BNP Paribas Securities Services as account bank, paying agent, cash manager and agent bank; and v) BNP Paribas as the interest rate cap provider. Scope considered counterparty replacement triggers and relied on publicly available ratings and its ratings on BNP Paribas SA (AA-/S-1+), the parent of BNP Paribas Securities Services.

Key rating drivers

Material portion of proceedings in advanced stages (positive). Around 35.4% of the secured loans are in the auction phase and 18.1% in the court distribution phase. This results in a lower expected time for collections than for loans in the initial phases of legal proceedings.

Hedging structure (positive). Interest rate risk on the class A is partially hedged through an interest rate cap agreement with a 0.4% cap strike from the fourth interest payment date, which gradually increases to 2.5% until January 2027.

Court distribution (positive). The courts tasked with the secured legal proceedings are mainly grouped with the faster courts, i.e. groups 2 and 3 with 50% and 25%, respectively (Scope classifies courts over seven groups; the lower the group number, the faster the court). This results in a lower expected time for collections than for loans in higher court groups.

Full and drive-by valuations (positive). 56.8% of the pool’s first-lien collateral valuations are either full or drive-by types. These appraisals are generally more accurate than desktop or CTU valuations.

High share of large unsecured exposures (negative). 34.4% of the unsecured loans have an individual exposure of at least EUR 3m by gross book value. Larger unsecured exposures tend to have lower recoveries.

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.

Borrower concentration (negative). The borrower concentration in the portfolio is above average compared to peer transactions rated by Scope. The 10 and 100 largest borrower exposures respectively account for 19% and 56.2% of gross book value. This may expose the transaction to increased performance volatility, depending on the recoveries from those few large borrowers.

Rating-change drivers

Servicer outperformance (upside). Consistent servicer outperformance in terms of recovery timing and the total amount of collections could positively impact the ratings. The weighted average time until portfolio collections are complete will be 4.8 years, according to the servicer’s business plan (starting from the pool cut-off date). This is about 10 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 cash flows, reflecting the transaction’s structural features, to calculate each tranche’s expected loss and weighted average life. 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 servicer’s capabilities when calibrating lifetime recoveries, also considering that unsecured borrowers were classified as defaulted for a weighted average of 4.9 years as of the 30 September 2018 cut-off date.

For the class A notes analysis, Scope assumed a gross recovery rate of 37.9% over a weighted average life of 5.6 years. By segment, Scope assumed a gross recovery rate of 59.8% for the secured portfolio and 8.3% for the unsecured portfolio. Scope has applied an average combined security value haircut of 38.5%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 31.3% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (10.5% on average), reflecting Scope’s view of downside market volatility risk. To calculate the security value haircut rate, Scope has removed the collateral positions sold between the cut-off date and issuance. Scope factored in legal expenses of 9% over gross collections, in line with average peer transaction assumptions, as well as the actual 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 11.7% to the 10 largest borrowers in class A analysis.

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

Stress testing
Stress testing was performed by applying rating-conditional recovery rate assumptions.

Cash flow analysis
Scope used its proprietary cash flow model (Scope CFM v.1) to analyse the transaction. The approach incorporated cash flow vectors from the assets and accounted for the transaction’s main structural features such as the notes’ priorities of payment, size and coupons.

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: David Bergman, Executive Director.
The ratings were first released by Scope on 8 February 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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