Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005316275), EUR 68.6m: downgraded to BB-_SF from BBB-_SF

Class B (ISIN IT0005316283), EUR 10.1m: downgraded to CC_SF from B-_SF

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

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

Transaction overview

Popolare 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. Prelios Credit Servicing S.p.A. is the special servicer. The loans were originated by Banca Popolare di Bari S.c.p.a and Cassa di Risparmio di Orvieto S.p.A., which both belong to the Banca Popolare di Bari banking group. The transaction closed on 5 December 2017 and the legal maturity is in October 2037.

As of 31 March 2020, aggregate gross collections were EUR 23.7m, which represents 70.9% of the original business plan expectations of EUR 33.4m. 58.8% of gross collections (EUR 13.9m) have come from closed debtors (i.e. debtors for which the recovery process has fully concluded). Total gross collections are split between discounted pay-off (‘DPO’) proceeds (41.0%), note sale proceeds (28.7%), judicial proceeds (22.2%) and other sources of collections (8.1%).

According to the most recent investor report, the cumulative collection ratio (net of recovery expenses) is 74.2% and the present value cumulative profitability ratio is 100.2% The latter has remained above the 90% trigger threshold since closing. Class B interest is subordinated to class A principal when profitability dips below 90%. There is no class b interest subordination trigger for cumulative collections.

Servicing and recovery fees amount to 11.1% of gross collections thus far.

18.6% of the class A notes’ principal notional balance has amortised since closing. As a result, class A credit enhancement relative to the portfolio’s outstanding gross book value has slightly increased to 78.2% from 75.7%.

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. Scope expects base case lifetime collections (B rating category) to be 14.6% lower compared to the gross expected collections forecasted at closing.

An increasing trend in note sales as a resolution strategy also warrants address, as profitability on these positions as a whole is below the business plan – 53.6% not accounting for net present value adjustments. Of the 101 loans sold via note sale, 73 were secured. Scope has also noted that note sales are often not closed in the semester they occurred, which creates a lag in the profitability calculation (profitability is only calculated on closed positions). Had note sales been closed in the most recent semester it is likely the profitability ratio would have dipped below 100%.

Scope also notes that in the most recently updated business plan, a significant share of expected unsecured recoveries have been backloaded to 2025. Collections on unsecured non-performing loans typically become increasing difficult to realise as they move further and further away from their respective original date of default. The adjustment in the business plan does not impact Scope’s own recovery assumptions; however, it is a qualitative factor that hints toward slower than expected collections.

The relatively weak class B interest subordination trigger has left the class A exposed to equity leakage, in spite of subpar performance since closing. There is also no subordination trigger on cumulative collections, which is now fairly standardized in Italian NPL transactions.

Relevant transaction counterparties are: 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. All counterparties continue to support the ratings.

Key rating drivers

CREDIT-POSITIVE (+)

Senior notes’ liquidity protection: A 4% cash reserve protects the liquidity of senior noteholders, covering roughly 11 months of senior fees and interest on the Class A notes¹.

CREDIT-NEGATIVE (-)

Cumulative collections: Observed cumulative net collections are reported to be 74.2% of the original business plan expectations through 31 March 2020. This represents five payment dates since closing, with consistent underperformance in each collection period².

Note sale strategy: The note sale trend is not a profitable strategy, especially considering the 50.7% recovery rate (based upon business plan expected collections) on secured loans. While this strategy helps offset current collection shortfalls, the note discount exceeds the time value of money savings.

Concentrated portfolio: At closing, 20 borrowers were expected to yield 55.5% of the lifetime gross expected collections in the original business plan. Only 10.4% of this top-20 share has been realised since closing.

Italian economy: The Italian economy faces a deep recession in 2020 fuelled by the Covid-19 pandemic. Despite governmental support measures, increased collateral liquidity risk and weakened borrower liquidity positions negatively affect recovery prospects³.

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.

Quicker DPO resolutions would benefit both cumulative collections and profitability.

A stronger secondary loan market could potentially improve the current note sale strategy by increasing recoveries as a percentage of business plan expectations.

NEGATIVE (-)

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

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 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. The class A rating scenario incorporated a gross recovery rate of 32.9% over a weighted average life of 6.3 years. The class B rating scenario incorporated a recovery rate of 34.8% over a weighted average life of 6.1 years.

By portfolio segment, Scope assumed a class A gross recovery rate of 52.8% and 11.0% for the secured and unsecured portfolios, respectively. Scope assumed a class B recovery rate of 55.9% and 11.7% for the secured and unsecured segments, respectively. Scope captured idiosyncratic risk by applying rating-conditional recovery rate haircuts to the 10 largest borrowers of 1.7% and 0.0%, for the class A and class B 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 class A notes change compared to the assigned rating in the event of:

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

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

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

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 using the Scope Cash Flow SF/EL Model Version 1.1. The analysis incorporated recovery rate and timing assumptions. It also took into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The analysis provided 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 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 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 has received a third-party asset due diligence assessment at closing. 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 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: Thomas Miller-Jones, Associate Director
Person responsible for approval of the rating: David Bergman, Managing Director
The rating was first released by Scope on 5 December 2017. The rating was last updated 13 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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