Class A (ISIN IT0005316275), EUR 68.6m: downgraded to BBB-_SF from BBB_SF; under review for downgrade

Class B (ISIN IT0005316283), EUR 10.1m: downgraded to B-_SF from B+_SF; under review for downgrade

Class J (ISIN IT0005316291), EUR 13.5m: not rated

Scope’s review is based on transaction reporting through 30 September 2019.

Transaction Overview

Bari NPLs 2017 S.r.l. is a static cash securitisation of secured and unsecured non-performing loans (NPLs) extended to companies and individuals in Italy. The loans are serviced by the special servicer Prelios Credit Servicing S.p.A. The transaction closed on 5 December 2017 and the legal maturity is in October 2037.

Rating rationale

The rating actions are driven by observed and expected performance of the transaction, as well as Scope’s updated modelling assumptions that reflected observed performance. Aggregate gross collections are EUR 21.1m versus original business plan expectations of EUR 24.9m. The reported cumulative collections ratio is 90.1% and the cumulative profitability ratio is 96.9%. Performance was derived via transaction reports through the 30 September 2019 collection period.

Scope also compared transaction performance to its own recovery assumptions, taking into account enhanced views on asset resolution timing, recovery estimates and macro-economic fundamentals, all developed through transaction-specific observations and benchmarking. Additionally, the absence of a strong Class B interest subordination trigger leaves the Class A noteholders exposed to continued leakage to Class B interest. Potential support from the GACS guarantee is not considered in the rating analysis.

Counterparties continue to support the ratings: i) Prelios Credit Servicing S.p.A., the special servicer and master servicer; ii) BNP Paribas Securities Services, Milan Branch, account bank, agent bank, cash manager and principal paying agent; and iv) JP Morgan AG as interest rate cap provider.

Key rating drivers

Senior notes’ liquidity protection (positive): A 4% cash reserve protects the liquidity of senior noteholders, covering senior fees and interest on Class A notes.

Cumulative collections (negative): Observed cumulative gross collections are 90.1% of the original business plan expectations through 30 September 2019. This represents four payment dates since closing, with consistent underperformance in each collection period.

Profitability (negative): Cumulative profitability through 30 September 2019 is 96.9%. An increased volume of note sales in the most recent collection period contributed the decreased cumulative profitability ratio.

Concentrated portfolio (negative): At closing the top 10 and top 100 debtor exposures account for 28.2 and 69.0% of the portfolio’s original GBV, respectively. To date, no collections have been realised on any of the top 10 borrowers.

Collateral liquidity risk (negative): Fire-sale discount assumptions constitute the primary source of portfolio performance stresses.

Positive rating-change driver

Servicer outperformance (upside). Consistent servicer outperformance in terms of recovery timing and the total amount of collections could positively impact the ratings.

Negative rating-change drivers

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

Sluggish real estate recovery. A slower-than-expected recovery, or an unexpected market downturn, could negatively impact the ratings.

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 has updated its modelling assumptions to reflect the current performance of the transaction. A gross recovery rate of 24.8% was considered over a weighted average life of 2.5 years in the BBB- rating scenario. A B rating recovery rate of 29.5% was considered over a weighted average life of 5.3 years.

By portfolio segment, Scope assumed a BBB- gross recovery rate of 42.3% and 5.8% for the secured and unsecured portfolios, respectively. Scope assumed a B gross recovery rate of 50.3% and 6.8% for the secured and unsecured segments, respectively. Scope captured idiosyncratic risk by applying rating-conditional recovery rate haircuts to the 10 largest borrowers, ranging from 0% to 8.3%.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations of the main input parameters: the mean-default rate and the recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings 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:

• 5% haircut to recoveries, four notch decrease
   
• a one-year recovery lag increase, four notch decrease.

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

• 5% haircut to recoveries, four notch decrease
   
• A one-year recovery lag increase, four notch decrease.

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 note.

Methodology
The methodologies used for these ratings are the Non-performing Loan ABS 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 received a third-party asset due diligence assessment at closing. 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 Thomas Miller-Jones, Associate Director.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The ratings were first released by Scope on 5 December 2017.

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
© 2019 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.

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