The rating actions are as follows:

Class A (ISIN IT0005387904), EUR 1,210,000,000: assigned a final rating of BBB+_SF

Class B (ISIN IT0005387912), EUR 80,000,000: assigned a final rating of B- _SF

Class J (ISIN IT0005387920), EUR 30,000,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 6,057m by gross book value “GBV” (as total gross claim amount)^*. The portfolio was owned by Unicredit S.p.A. (Unicredit). The pool is composed of both senior secured (64.0%) and unsecured (36.0%) loans (including junior secured loans). The loans were extended only to individuals. Secured loans are backed mostly by first-lien mortgages on residential properties (90.2% of property values), whilst the remainder collateral (9.8%) is composed of commercial, land and other type of properties. Properties are well distributed across Italy, with similar shares in the north (37.1%), centre (24.2%), and south (38.6%) of the country. The issuer acquired the portfolio as at the transfer date (11 October 2019). 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 1.5% and 9.0%, respectively. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes.

The notes have been structured considering the requirements of the 2019-updated GACS Scheme¹.

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 findings of the third-party asset due diligence assessment showed a slightly higher error level than normally seen in peer transactions. This is partially mitigated by (i) the fact that the servicer has committed to verify on a portion equal to 80% of the secured loans, the accuracy of the representations and warranties provided by Unicredit, and promptly report any discrepancies, and (ii) Unicredit’s representations on the accuracy of the data included in the datatape, Scope has also performed a sensitivity analysis to test the resilience of the ratings to potential lower valuations.

The ratings also address exposures to the key transaction counterparties. In Scope’s view, none of these exposures limits the maximum ratings achievable by the transaction. In order to assess the issuer’s exposure to credit counterparty risks, Scope considered counterparty substitution provisions in the transaction, ratings from Scope, when available or public ratings.

Key rating drivers

All borrowers are individuals (positive). Recoveries from individual borrowers are generally higher than from corporates, given their lower average exposure, and since loans collaterals are residential properties, which are more liquid than commercial or industrial assets.

High granularity (positive). The pool is highly granular, with the top 10 borrowers representing around 0.4% of total gross book value, which is lower than the average concentration of Italian NPL transactions rated by Scope.

High share of foreclosures (positive). Most of the pool presents loans under foreclosure legal procedures (76.1%, excluding loans for which the legal procedures have not been initiated). Compared with bankruptcy proceedings, foreclosures typically result in higher recoveries and take shorter to be resolved.

Servicing business continuity (positive). The servicer is already in charge of managing most of the portfolio prior to the expected issue date. The servicer has therefore performed most of the portfolio take-over activities, including the set-up of servicing strategies.

High share of residential properties (positive). 90.2% of the secured loans are backed by residential assets, which tend to be more liquid than non-residential properties.

Absence of detailed information on valuations’ techniques (negative). 37.1% of the pools’ first-lien collateral has been evaluated using statistical revaluations (i.e., indexed valuations) or based on open market value valuations (33.1%). However, we have not received any detailed information regarding the valuation technique used. Therefore, we applied a higher haircut to these valuations to account for the risk of overstated valuations.

High seasoning of unsecured exposures (negative). Unsecured exposures have a weighted average seasoning of 6.8 years, which is higher than the average seasoning of other transactions rated by Scope. This ultimately results in lower expected recoveries for the relevant share of loans.

Hedging structure (negative). Interest rate risk on the class A and class B notes is mitigated by an increasing cap on the six-month Euribor (ranging from 0.20% to 1.25%). However, the interest rate cap agreement provides only a partial hedging, as the cap notional schedule is not fully aligned with Scope’s expected amortisation profile of the notes.

Unsecured loans are residual claims after security enforcement (negative). The unsecured component of 35.7% in terms of gross book value is made of residual unsecured claims after security enforcement (i.e., shortfalls) rather than pure ab-origine unsecured exposures. Scope expects a lower recovery rate for this type of loans compared other type of unsecured loans: the average high seasoning of shortfalls, along with the recovery strategies’ costs, significantly reduce the likelihood to recover.

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 4.20 years, according to the servicer business plan. This is about 15 months faster than the recovery weighted timing vector assumed in Scope’s Class A analysis.

Servicer underperformance (downside). Servicer performance falling 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 0.7%, the government’s plans to reverse reforms, raise spending, 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. 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. Scope also considered that unsecured borrowers were classified as defaulted for a weighted average of 6.8 years as of the cut-off dates of 31 March 2019 (related to 97% of the portfolio) and 31 July 2019.

For the class A notes analysis, Scope assumed a gross recovery rate of 31.1% over a weighted average life of 5.4 years. By segment, Scope assumed a gross recovery rate of 47.9% for the secured portfolio and 1.3% for the unsecured portfolio. Scope has applied an average combined security value haircut of 43.3%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 34.1% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (14.0% 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 the issuance date. Scope factored in legal expenses of 12% over gross collections, relatively above the 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 the class A analysis.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations in the main input parameters: the portfolio recovery-rate and the portfolio 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 three notches.
   
• an increase in the recovery lag by one year, minus two notches.

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

1 Italian law decree No. 18 of 14 February 2016 converted into law No. 49 of 8 April 2016, subsequently amended and supplemented under Italian law decree No. 22 of 25 March 2019, converted into Italian law No. 41 of 20 May 2019.

* The reference to GBV and total gross claim amount was added on 22 October 2019. In the initial publication from 18 October 2019, this was not included.

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

Cash flow analysis
Scope performed a cash flow analysis of the transaction with the use of Scope Cash Flow SF/EL Model Version 1.1.0 incorporating default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for these ratings are the Non-Performing Loan ABS Rating Methodology and the Methodology for Counterparty Risk in Structured Finance, 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
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 received a third-party asset due diligence assessment. The external due diligence assessment was considered when preparing the ratings and it 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 the credit ratings are 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: David Bergman, Managing Director.
The ratings were first released by Scope on 18 October 2019.

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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