The rating actions are as follows:

Class A (ISIN IT0005396061), EUR 173,000,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005396079), EUR 25,000,000: assigned a final rating of CCC_SF

Class J (ISIN IT0005396087), EUR 5,000,000: not rated

Transaction overview

The transaction is a cash securitisation of a static Italian non-performing loan (NPL) multi-originator portfolio of EUR 826.7m by gross book value.

The portfolio was originated by 12 Italian banks (as reported in the appendix of the press release). The portfolio will be serviced by Prelios Credit Solutions S.p.A. and Fire S.p.A. as special servicers and Prelios Credit Services S.p.A. as master servicer.

The pool comprises both secured (46.9%) and unsecured (53.1%) loans (including junior secured loans). The loans were extended to companies (72.2%) and individuals (27.8%). Secured loans are backed by residential and non-residential properties (54.4% and 45.6% of the total first-lien property value, respectively) that are mostly distributed across the Sicily and the south of Italy (70.1%), the country’s north (21.2%) and the remainder in the centre (8.7%) The issuer acquired the portfolio at the transfer date of 10 December 2019 but is entitled to all portfolio collections received since 31 December 2018 (the portfolio cut-off date). Asset information reflects aggregation by loans and Scope’s pool adjustments, as highlighted in the section ‘quantitative analysis and key assumptions’.

The structure comprises three classes of notes with fully sequential principal amortisation. Class B interest payments rank senior to class A principal. Class B interests will be subordinated to class A principal repayment if the cumulative amount of collections are more than 10% below the level indicated in the servicer’s business plan or if the present value cumulative profitability ratio falls below 90%. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes. Class A and B will pay a floating rate based on six-month Euribor plus a margin of 0.3% and 9.5%, respectively. Class B interest senior to class A repayment is capped at 9.5% if 6M Euribor is positive. The Euribor component, if positive, ranks junior to class A principal.

Interest rate risk on the class A notes is mitigated through a hedging structure, which applies an increasing cap rate to six-month Euribor ranging from 0.25% to 2%. In addition, the base rate on the class A notes will be partially hedged through an interest rate cap agreement with a cap strike of 0% over a pre-defined notional balance. The interest rate risk related to the class B notes is not hedged, but is mitigated by the fact that the Euribor component, if positive, ranks junior to Class A principal.

The notes have been structured in accordance with requirements under the GACS scheme, updated in 2019.

The transaction may involve the participation of a real estate operating company which has not been considered in Scope’s analysis.

Rating rationale

The ratings are primarily driven by the expected recovery amounts and by the timing of collections from the NPL portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics, Scope’s economic outlook for Italy, and the assessment of the special servicers’ capabilities. The ratings consider the structural protection provided to the notes, the absence of equity leakage provisions, the liquidity protection provided by the cash reserve, and the interest rate hedging agreements.

The ratings also address the exposure to the key transaction counterparties: i) the originators/sellers, regarding representation and warranties and the eventual payments that might be made by the borrowers and limited recourse loan providers ii) Prelios Credit Servicing S.p.A. as master servicer; iii) Prelios Credit Solutions S.p.A. and Fire S.p.A. as special servicers; iv) Securitisation Servicers S.p.A. as back-up master servicer, noteholders’ representative, calculation agent and corporate servicer; v) BNP Paribas Securities Services, Milan Branch as account bank, paying agent, cash manager and agent bank; Poste Italiane S.p.A. as collection account bank; vii) Zenith Service S.p.A. as monitoring agent; and viii) JP Morgan AG as the interest rate cap provider. The analysis also considered the replacement mechanisms available on the respective counterparty roles.

Key rating drivers

Portfolio servicing (positive). Two independent servicers limit the transaction’s sensitivity to servicer disruption. In the event of a servicer disruption, the monitoring agent will assist the issuer in finding a suitable replacement.

Residential collateral (positive). Approximately 54.4% of the secured first-lien collateral consists of residential real estate, which is typically more liquid than commercial, industrial and land property-types, and usually does not experience the same level of discounts and lengthy liquidation timelines.

Hedging structure (positive). Interest rate risk on the class A notes is mitigated through a hedging structure, which applies an increasing cap rate to six-month Euribor ranging from 0.25% to 2%. In addition, the base rate on the class A notes will be partially hedged through an interest rate cap agreement with a cap strike of 0% over a pre-defined notional balance. The interest rate risk coverage starts from July 2020. The notional schedule for the cap covering class A is well alligned with our expected amortisation profile on the notes. The interest rate risk related to the class B notes is not hedged, but is mitigated by the fact that the Euribor component, if positive, ranks junior to Class A principal.

Fee and cost structure (positive). The semi-annual master fees, special servicer fees and legal and procedure costs are capped at 4%, 10% and 6% of the semi-annual gross cash flow, respectively. Unpaid amounts due to the cap are only paid when class A has been paid in full.

Geographic concentration (negative). 43.8% of the portfolio’s first-lien collateral is concentrated in Sicily (48.6% by GBV). This lack of geographical diversification exposes the transaction to specific local risks. These risks include the possible weak performance of the economy and its impact on property prices, slow court resolution timelines, and the impact of seismic activity, all of which potentially affect the realisation of value of the properties securing the loans. Exposure to seismic events is mitigated by insurance.

Property type (negative). The proportion of property under construction is higher than for other peer transactions (11.3% of total first-lien property), Unfinsihed properties usually experience a higher level of discounts and lengthy liquidation timelines.

Seasoned unsecured portfolio (negative). The weighted average time since loan default is approximately 7.7 years for the unsecured portion, which is significantly longer than for most Italian NPL securitisations. Most unsecured recoveries are realised in the first years after a default, according to historical data.

Rating-change drivers

Legal costs (upside). Scope has factored in a level of legal expenses for collections as specified under the ‘Quantitative analysis and key assumptions’ section. A decrease in legal expenses compared to Scope’s initial expectations could positively affect the ratings.

Servicer outperformance regarding recovery timing (upside). Consistent servicer outperformance in terms of recovery timing could positively impact the ratings. Portfolio collections will be completed over a weighted average period of 5 years according to the servicer’s business plan. This is about 18 months faster than the recovery weighted timing vector applied in our analysis.

Servicer underperformance (downside). Servicer performance below Scope’s base case collection amounts and timing assumptions 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 performed a cash flow analysis which considers the structural features of the transaction in order to calculate the expected loss and weighted average life for each tranche. 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 the secured and unsecured exposures. For secured exposures, collection assumptions were mostly based on up-to-date 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 at the cut-off date. For unsecured exposures, Scope used historical, line-by-line recovery data on defaulted loans between 1995 and 2017. Historical data has been used to calibrate recoveries, considering unsecured borrowers to be classified as defaulted for a weighted average of 7.7 years as of closing. Scope also analysed historical data provided by the servicer.

Scope has adjusted the pool’s gross book value using information on sold properties. Specifically, the analysis has excluded from the portfolio those loans that the agency has assumed to be closed, based on cash in court to be received. Collateral connected with these positions has also been removed. Overall, Scope’s adjustments have reduced the pool to EUR 781.7m in gross book value, by deducting the gross book value related to those loans which have been partially or totally recovered, following the presence of cash in court amounts.

For the analysis of the class A notes, Scope assumed a gross recovery rate of 29.5% over a weighted average life of 6.6 years. By segment, Scope assumed a gross recovery rate of 52% for the secured portfolio and of 9.7% for the unsecured portfolio. Scope has applied an average combined security value haircut of 47.6% which consists of i) an average fire-sale discount (including valuation type haircuts) of 37.5% to security valuations, reflecting liquidity or marketability risks, and ii) property price decline stresses (16.2% on average), reflecting Scope’s view of downside market volatility risk. The stresses for the rest of provinces on Italy’s south and islands incorporate a level that is 56% higher than Scope’s standard stresses. This accounts for the portfolio’s heavy concentration in this region. Scope factored in legal expenses of 9% over gross collections, in line with average peer transaction assumptions, and the servicer’s fee structure.

For the analysis of the class B notes, Scope assumed a gross recovery rate of 35.6% over a weighted average life of 5.8 years. By portfolio segment, Scope has assumed a gross recovery rate of 63.2% and 11.1% for the secured and unsecured portfolios, respectively.
Scope captured single asset exposure risks by applying to the 10 largest borrowers a rating-conditional recovery rate haircut of 10% in the BBB rating scenario.

Rating sensitivity

Scope tested the resilience of the ratings against deviations from the main input assumptions: recovery-rate level and recovery timing. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and it 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%, negative: one notch;
• an increase in the recovery lag by one year, no impact: less than one notch.

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%, no impact: les than one notch;
• an increase in the recovery lag by one year, no impact: less than one notch.

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: the rated entity, 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: Martin Hartmann, Associate Director.
Person responsible for approval of the rating: David Bergman, Managing Director.
The rating was first released by Scope on 23 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.

Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Directors: Torsten Hinrichs and Guillaume Jolivet.

Appendix:

Originators:
Banca di Piacenza Soc. Coop. per Azioni
Banca Popolare di Fondi S.c.
Banca Popolare del Frusinate S.c.p.A.
Banca Popolare del Lazio S.c.p.A.
Banca Popolare di Puglia e Basilicata S.c.p.A.
Banca Popolare Pugliese S.c.p.A.
Banca Agricola Popolare di Ragusa S.c.p.A.
Banca di Credito Popolare S.c.p.A.
Cassa di Risparmio di Asti S.p.A.
Banca di Cividale Società Cooperativa per Azioni
Cassa di Risparmio di Biella e Vercelli S.p.A.
Banca del Sud S.p.A.