The rating actions are as follows:

Class A (ISIN IT0005395352), EUR 335,000,000: definitive rating of BBB_SF

Class B (ISIN IT0005395360), EUR 25,000,000: not rated

Class J (ISIN IT0005395378), EUR 13,459,000: not rated

The latest information on the rating, including rating reports and related methodologies are available on this LINK.

Transaction overview

The transaction is a static cash securitisation of senior secured (92.2% in terms of gross book value, or GBV) and unsecured as well as junior secured (7.8%) non-performing loans (NPLs). The loans were originated by UBI Banca S.p.A. and granted exclusively to individuals in Italy. Most of the secured loans are backed by residential properties (94.8% in terms of total properties’ value), while the residual portion (5.2%) is composed of commercial, land and industrial properties. Borrowers are mostly concentrated in the northern part of Italy (52.8%), followed by southern (30.5%), and central (16.7%) regions. The issuer acquired the portfolio on the 4th December 2019 (the transfer date).

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 interest rate indexed to six-month Euribor, plus a margin of 0.5% and 6.0%, respectively. Class J principal and interests are subordinated to repayment of senior and mezzanine notes. The final maturity of the notes is July 2039.

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

Rating rationale

The rating is primarily driven by the expected recovery amounts and timing of collections from the NPL portfolio, which consider the portfolio’s characteristics, the assessment of the special servicer’s capabilities as well as Scope’s economic outlook for Italy. The rating is supported by the structural protection provided to the notes; the absence of equity leakage provisions; liquidity protection; and an interest rate hedging agreement.

The rating also addresses exposures to the key transaction counterparties. In Scope’s view, none of these exposures limits the maximum rating achievable by the notes. 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

Secured portfolio mostly backed by residential properties (positive). Compared to peer transactions rated by Scope, the portfolio has a higher share of first lien mortgage loans, for which the average recovery rate is usually higher than for other loan types. In addition, the large proportion of residential collaterals (94.8% of secured loans), reduces liquidity and concentration risks.

High share of foreclosures (positive). Most of the loans are under foreclosure legal procedures (83.2%, 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.

High granularity (positive). The pool is highly granular, with the top 10 and top 100 borrowers representing, respectively, 1.7% and 7.4% of total GBV, which is lower compared to other Italian NPL transactions rated by Scope.

Geographical distribution (positive). The portfolio is concentrated in the northern part of Italy, which benefit from the most dynamic economic conditions in the country and, in general, the most efficient tribunals.

Pool contains loans with incomplete documentation (negative). Contractual documentation is missing for a portion of the portfolio (6.1% of total GBV). This could cause a delay in the recovery process as the court would require a validated notice of loss before activating any judicial procedures. Scope has considered this feature in its analysis by applying a further stress on the recovery timing.

Material portion of legal proceedings in initial stages (negative). Around 64.4% of the secured loans are in the initial legal phase or are yet to have proceedings initiated.

Hedging structure (negative). Interest rate risk on the class A and class B notes is mitigated by an increasing interest rate cap on the six-month Euribor (ranging from 0.30% to 1.25%). However, the cap notional schedule is not fully aligned with Scope’s expected amortisation profile of the notes.

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 4.9 years, according to the servicer business plan. This is about 6 months faster than the recovery weighted timing vector assumed in Scope’s class A analysis.

Legal costs (downside). An increase of the legal expenses compared to Scope’s initial assumption could negatively affect the rating.

Servicer underperformance (downside). Servicer performance falling short of Scope’s base case collection amounts could negatively impact the ratings.

Fragile economic growth (downside). Recovery rates are generally highly dependent on the 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 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 4.6 years as of the cut-off date of 31 March 2019.

For the class A notes analysis, Scope assumed a gross recovery rate of 52.4% over a weighted average life of 5.4 years. By segment, Scope assumed a gross recovery rate of 54.7% for the secured portfolio and 16.5% for the unsecured portfolio. Scope has applied an average combined security value haircut of 38.7%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 30%, reflecting liquidity or marketability risks; and ii) property price decline stresses (12.4% 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 issue date. Scope assumed 9.0% of legal expenses over gross collections

Scope captured single asset exposure risks by applying a recovery rate haircut of 10% 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 of the portfolio’s recovery rate by 10%, minus two notches.
   
• an increase of the recovery lag by one year, minus zero 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, 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 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 rating, the rated entity was given the opportunity to review the rating and the principal grounds on which the credit rating is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating is issued by Scope Ratings GmbH.
Lead analyst: Leonardo Scavo, Analyst.
Person responsible for approval of the rating: David Bergman, Managing Director.
The rating was first released by Scope on 16 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
© 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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