The rating actions are as follows:

Class A (ISIN IT0005394454), EUR 286,474,000: assigned a final rating of BBB+_SF

Class B (ISIN IT0005394462), EUR 33,703,000: assigned a final rating of BB_SF

Class J (ISIN IT0005394751), EUR 16,852,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 5,027m by gross-book value (GBV). The portfolio was originally acquired by Hoist Finance Group, through two special purpose vehicles (Marte SPV S.r.l. and Pinzolo SPV S.r.l.) from 17 financial institutions (the original lenders) and it is now being transferred to Marathon SPV S.r.l., in the context of the present transaction.

The pool is fully unsecured and is composed of three major type of receivables: consumer loans (30.8%), loans guaranteed by promissory notes (19.6%) and unsecured banking loans (49.6%).
Loans were both granted to individuals (57.4%) and to small and medium-sized enterprises (42.6%). Borrowers are concentrated in the north of Italy (53.4%), whilst the remainder are distributed with similar shares in the centre (17.9%), south (17.2%) and islands (11.5%) areas of the country. The issuer acquired the portfolio as of 22 November 2019.

The structure comprises three classes of notes: senior class A, mezzanine class B, and junior class J. Class A and B pay fixed interest rates of 1.8% and 8%, respectively. The structure contains an equity leakage feature, which allows for a pre-amortisation of class B using up to 10% of the issuer remaining funds after the payments of class A and B interests, in case the transaction is performing above 95% of the business plan. The structure allows for the subordination of the mezzanine interests to class A principal repayment, in case of a performance below 80% of the business plan. 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 the assessment of the special servicer’s capabilities. The ratings also consider the liquidity protection provided by the cash reserve.

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

Key rating drivers

Relatively high share of loans guaranteed by promissory notes follows performing repayment plans (positive). Ca. 32% of the loans guaranteed by promissory notes follows performing repayment plans, based on the historical data provided by the servicer.

Servicing business continuity (positive). The servicer has already been managing the portfolio prior to the issue date, since its acquisition by Hoist from the original lenders. The servicer has therefore performed the portfolio take-over activities, including the set-up of servicing strategies. This reduces the expected ramp-up period typically observed for peer transactions and during which the servicer may underperform. It also mitigates the likelihood of the servicer raising indemnity requests, since it already performed a due diligence on the portfolio.

High granularity (positive). The pool is highly granular, with an average exposure per borrower of EUR 12.179. This mitigates portfolio’s concentration risk.

Diversified type of exposures (positive). The portfolio consists of different type of exposures: unsecured banking loans (49.6%), consumer loans (30.8%) and loans guaranteed by promissory notes (19.6%). Its diversified nature helps mitigating the recovery and timing risks associated to each specific segment.

High share of consumer loans with missing default date (negative). Consumer loans have 6.6 years of seasoning, however, 18% (in terms of GBV) have no default date. Under the assumption that those loans represent exposures maintained on lenders’ balance sheets for a long period of time, consumer loans’ seasoning significantly increases, resulting into lower expected recoveries.

Below average liquidity protection (negative). The cash reserve is equal to 3% of class A notes, with no floor. Scope expects the cash reserve to cover at closing 9.3 months of senior costs and interest on the class A notes.

Promissory note account bank has no rating substitution trigger (negative). Proceeds related to promissory notes are collected on the promissory notes collection account (held with DEPObank - Banca Depositaria Italiana S.p.A.). There is no rating substitution trigger to mitigate the counterparty risk; however, promissory notes’ proceeds are swept on the same day as collections into the investment account.

High share of loans with no default date (negative). 7% ca. of portfolio’s GBV is represented by loans with no default date. Considering their potential high seasoning, they have been evaluated by Scope based on high stressed scenarios.

Rating-change drivers

Lower than expected legal expenses (upside). A decrease in legal expenses could positively affect the ratings. Scope has factored in legal expenses for collections in alignment with servicer’s business plan (9% of gross collections).

Outperformance of loans with missing default date (upside). Higher recoveries on loans that have no default date could positively impact the ratings.

Servicer underperformance (downside). The role of the servicer is key for the performance of the transaction. A consistent servicer underperformance could negatively impact the ratings.

Fragile economic growth (downside). Recovery rates are generally highly dependent on the country’s macroeconomic climate. If the Italian GDP medium-term growth falls below 0.7%, the level forecasted in Scope’s current outlook, ratings could be negatively impacted.

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 exposures to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.

Scope performed a specific analysis for the portfolio’s unsecured exposures, based on the historical data provided by the servicer and covering its acquisitions since 2011. The historical dataset comprised loans, which are representative type of exposures and lender’s share in the portfolio. However, historical data does not cover the entire life of loans since their default, but only since their acquisition by the servicer. Scope also used historical line-by-line market-wide recovery data on unsecured defaulted loans between 2000 and 2017. Furthermore, Scope 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 7.5 years (excluding loans with a missing default date) as of the cut-off date of 30 September 2019.

For the class A notes analysis, Scope assumed a gross recovery rate of 9.2% over a weighted average life of 3.08 years while the assumption for the class B analysis was a gross recovery rate of 10.4% and a weighted average life of 3.1 years.

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 unsecured recovery rates by 10%, minus two notches.
   
• an increase in the recovery lag by one year, no impact.

The following shows how the results for class B change compared to the assigned credit rating in the event of:

• a decrease in unsecured recovery rates by 10%, minus two notches.
   
• an increase in the recovery lag by one year, minus four notches.

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 1.1.1 incorporating default and recovery rate assumptions over the portfolio’s amortisation period, considering 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
These 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 5 December 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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