Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005337735), EUR 217.5m outstanding amount: downgraded to BBB-_SF from BBB_SF

Class B (ISIN IT0005337743), EUR 30.2m outstanding amount: downgraded to B-_SF from B_SF

Class J (ISIN IT0005337750), EUR 9.0m outstanding amount: not rated

Scope’s review was based on available payment information, and investor and servicer reporting as of January 2020.

Transaction overview

2Worlds 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 were originated by Banco di Desio e della Brianza S.p.A. and Banca Popolare di Spoleto S.p.A. The issuer acquired the portfolio on the transfer date, 12 June 2018, but is entitled to all portfolio collections received since 31 December 2017 (the portfolio cut-off date). The final maturity is in January 2037¹.

As of 31 December 2019, aggregate gross collections were EUR 104.0m, which represents 96.4% of the original business plan expectation of EUR 107.8m². Around 73% of gross collections (EUR 76.0m) come from open debtors (i.e. debtors for which the recovery process is still ongoing). The main sources of total available gross collections are judicial proceeds (46.0%) and discounted pay-off (DPO) proceeds (28.9%) and other sources of collections (20.8%) including cash-in-court proceeds and ad-interim collections after the portfolio cut-off date. Cumulative net collections (gross collections reduced by the amount of recovery expenses) amount to EUR 98.4m, equal to 97.9% of the original business plan expectation of EUR 100.5m.

Around 24.6% of the class A notes’ notional has amortised. As a result, class A credit enhancement relative to the portfolio’s outstanding gross book value has increased slightly to 75.3% from 71.2%, while class B credit enhancement has increased to 71.9% from 68.2%.

Interest on class B is subordinated to the payment of class A principal if the cumulative collection ratio or the net present value (NPV) cumulative profitability ratio falls below 85% of the servicer’s business plan target. The cumulative collection ratio and NPV profitability ratio are 96% and 122% respectively. Therefore, a class B interest subordination event has not occurred. There is no unpaid interest on the class A or class B notes.

Rating rationale

The rating action is driven by Scope’s updated modelling assumptions, which reflect the agency’s view that the consequences of Covid-19 will weigh negatively on transaction performance going forward. This will, in particular, be due to an average delay in collections of at least one year, expected property price declines of about 5% in the short term, and potentially lower unsecured recovery proceeds. The rating action is supported by satisfactory transaction performance to date, relative to the servicer’s business plan and Scope’s initial assumptions. Scope also conducted a sensitivity analysis which showed that the class A notes would be fairly resilient to an additional one-year delay in collections and to an additional recovery rate haircut relative to the agency’s updated assumptions.

All counterparties continue to support the ratings: i) Banco di Desio and Banca Popolare di Spoleto, the two originators, regarding representation and warranties and possible payments from borrowers, especially for the cash-in-court cases; ii) Cerved Credit Management S.p.A., the special servicer; iii) Cerved Master Services S.p.A., the master servicer; iv) Securitisation Services S.p.A., the backup servicer, calculation agent, and noteholders’ representative; v) Zenith Service S.p.A., the monitoring agent; vi) BNP Paribas Securities Services (Milan Branch), the account bank, cash manager, and principal paying agent; and vi) Banca IMI S.p.A., the interest rate cap counterparty.

Key rating drivers

Italian economy (negative): The Italian economy faces a deep recession in 2020 fuelled by the Covid-19 pandemic³. Despite governmental support measures, increased collateral liquidity risk and weakened borrower liquidity positions negatively affect recovery prospects.

Collateral appraisal values (negative): NPL collateral appraisals are more uncertain than standard appraisals because repossessed assets are more likely to deteriorate in value. Collateral asset values which prove lower than initially expected have already contributed to reductions of expected collections in the business plan.

Cumulative collections (positive): The observed cumulative collection ratio of 96% and NPV cumulative profitability ratio of 122% as of 31 December 2019, i.e. three collection periods since closing, demonstrate that the transaction has performed adequately in the past.

Liquidity protection (positive): A cash reserve equal to 4.05% of the principal amount outstanding for the class A and class B notes protects the liquidity of senior noteholders, covering senior expenses and interest on the class A notes for about four payment dates.

Interest rate cap (positive): An interest rate cap, with an increasing strike schedule which ranges from 0.3% as of closing to 1.25% from January 2025, mitigates the risk of increased liabilities on the notes in the event of a rise in Euribor levels.

Rating-change drivers

Positive. An unlikely scenario of rapid economic recovery resulting in servicer outperformance compared to Scope’s updated assumptions in terms of recovery timing and the total amount of collections could positively affect the ratings.

Negative. If the Covid-19 pandemic lasts longer than expected, the supportive measures taken by the Italian government may prove insufficient. This could lead to lower collection amounts and delayed recovery timings, both negatively impacting the rating.

Quantitative analysis and assumptions

Scope analysed cash flows, reflecting the transaction’s structural features, to calculate each tranche’s expected loss and weighted average life. Scope also analysed the assets to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.

Scope updated its modelling assumptions to reflect the current performance of the transaction. The class A rating scenario (BBB-) incorporated a gross recovery rate of 39.6% over a weighted average life of 6.8 years. A baseline (B rating category) recovery rate of 43.3% was considered over a weighted average life of 6.4 years.

By portfolio segment, Scope assumed class A gross recovery rates of 63.7% and 11.6% for the secured and unsecured portfolios, respectively. Scope assumed B category gross recovery rates of 69.2% and 13.4% for the secured and unsecured segments, respectively. Scope captured idiosyncratic risk by applying rating-conditional recovery rate haircuts to the 10 largest borrowers of 0% and 8.3% for B and BBB- recovery rate scenarios, respectively.

Sensitivity analysis

Scope tested the resilience of the rating to deviations in expected recovery rates and 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 the class A notes change compared to the assigned rating in the event of:

• a 10% haircut to recoveries, one notch decrease;
   
• a one-year recovery lag increase, one notch decrease.

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

• a 10% haircut to recoveries, three notch decrease;
   
• a one-year recovery lag increase, one notch decrease.

Rating driver references
1 Confidential documents of the issuer, arranger and originators
2 Confidential servicer reports
3 Scope’s economic research

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 incorporating recovery rate and timing 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 this rating were Scope’s ‘Non-Performing Loan ABS Rating Methodology’ published on 3 September 2019 and its ‘Methodology for Counterparty Risk in Structured Finance’ published on 24 July 2019. All documents are available on https://www.scoperatings.com/#!methodology/list.
The model/s used for this rating Scope Cash Flow SF EL Model Version 1.1  is available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

Solicitation, key sources and quality of information
The rated entity and/or 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 rating 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 rating and it had negative impact on the credit rating.
Prior to the issuance of the rating action, 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Adam Plajner, Senior Analyst
Person responsible for approval of the rating: Antonio Casado, Executive Director
The rating was first released by Scope on 25 June 2018.

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
© 2020 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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