The rating actions are as follows:

Class A (ISIN IT0005395402), EUR 158,000,000: rated BBB_SF

Class B (ISIN IT0005395410), EUR 37,000,000: not rated

Class J (ISIN IT0005395428), EUR 8,000,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 1,256m by gross-book value (“GBV”). The portfolio was originated by 53 different banks (as “original lenders”). The pool is composed of senior secured (45.7%), unsecured (48.2%) and junior secured loans (6.1%). The loans were extended mostly to corporate borrowers (78%). Secured loans are backed by first-lien mortgages on residential properties (44.7% of property values), and industrial assets (20.5%), whilst the remainder collateral (34.8%) is composed of commercial, land and other type of properties. Properties are mostly concentrated in the north of Italy (74.1%), whilst they present similar shares in the centre (14.6%), and south (11.3%) of the country. The issuer acquired the portfolio on the transfer date of 3 December 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. Class A will pay a floating rate indexed to six-month Euribor, plus a margin of 3.0%, whilst Class B will pay a fixed rate of 6.0%. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes. Guber Banca S.p.A. (“Guber”) has been appointed as special servicer.

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 Scope’s 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; the liquidity protection; and the interest rate hedging agreement.

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

Key rating drivers

Guber is already servicing the portfolio (positive). Guber is already in charge of managing 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.

Portfolio concentrated in the north of Italy (positive). The portfolio is mostly concentrated in the north of Italy (74% of GBV), which benefits from the country’s most dynamic economic conditions and, in general, the most efficient tribunals.

Hedging structure (positive). Interest rate risk on the class A is hedged through an interest rate cap agreement with a 0.2% cap strike, which gradually increases to 3.0% until May 2033. Class A is fully hedged under Scope’s rating scenario.

Above average share of industrial assets, of which about 15% report a missing valuation date (negative). 21% of the secured loans are backed by industrial assets, a share which is higher than the average of peer transactions rated by Scope. In addition, valuation dates are missing for about 15% of this type of assets (3% of pool’s assets).

High share of desktop and statistical valuations (negative). According to Scope’s classification about 77% of the pools’ first-lien collateral were evaluated using desktop (53%) or statistical valuations (24%). Scope received high level aggregates of the valuation type rather than unique loan-by-loan data specifying the valuation type used and therefore Scope took conservative assumptions regarding the valuation types.

High share of assets under construction (negative). More than 2% of pool’s properties are assets under construction. In peer transactions the relevant share is typically less significant. The additional costs required to complete property construction or the event of failure to finish the property, generally translates into lower recoveries compared to finished properties.

Rating-change drivers

Servicer outperformance (upside). Consistent servicer outperformance in terms of recovery timing and the total amount of collections could positively impact the rating. The weighted average time until portfolio collections are complete will be 3.7 years, according to the servicer business plan. This is about 27 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 rating.

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, rating 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 mainly based on the most recent property appraisal values, which were stressed to account for, appraisal type, 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 6.1 years as of the cut-off date of 30 June 2019.

For the class A notes analysis, Scope assumed a gross recovery rate of 20.9% over a weighted average life of 5.9 years. By segment, Scope assumed a gross recovery rate of 36.7% for the secured portfolio and 7.6% for the unsecured portfolio. Scope has applied an average combined security value haircut of 45.7%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 36.0% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (14.9% 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 aligned with the average of peer transaction assumptions. Scope also considered the actual servicer fee structure, along with the cost of the interest rate cap structure.

Scope captured single asset exposure risks by applying a recovery rate haircut of 10.0% to the 10 largest borrowers in the class A analysis.

Sensitivity analysis

Scope tested the resilience of the rating 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 zero notches.
   
• an increase in 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 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 rating 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 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 Rossella Ghidoni, Associate Director.
Person responsible for approval of the ratings: 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
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