The rating actions are as follows:

Class A (ISIN IT0005413155), EUR 235,000,000: rated BBB_SF

Class B (ISIN IT0005413163), EUR 35,000,000: not rated

Class J (ISIN IT0005413189), EUR 3,651,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 999.7m by gross-book value (“GBV”). The portfolio was originated by Banca Popolare di Sondrio S.C.p.A. The pool is composed of senior secured (64.7%), unsecured (31.9%) and junior secured loans (3.4%). The loans were extended mostly to corporate borrowers (78.5%). Secured loans are backed by first-lien mortgages on residential properties (46.5% of property values), commercial assets (17.0%), land (14.1%) and industrial assets (13.5%), whilst the remainder collateral (8.9%) is composed of other type of properties. Properties are concentrated in the north of Italy (83.8%), while the rest of the assets are distributed in the centre (9.7%), and south (6.5%) of the country. The issuer acquired the portfolio on the transfer date of 1 June 2020. 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 0.5%, whilst Class B will pay a floating rate indexed to six-month Euribor, plus a margin of 9.0%. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes. Prelios Credit Servicing S.p.A. has been appointed as special servicer.

Rating rationale

The rating is 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 rating is 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 rating also addresses exposures to the key transaction counterparties. 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. The expenses accounts and an ad-interim collection account (mostly used for promissory notes, bank checks and other residual type of proceeds) will be held at Banca Popolare di Sondrio S.C.p.A. (the “Italian account bank”). The rating replacement trigger for the Italian account bank is not aligned with the criteria described in Scope’s Methodology for Counterparty Risk in Structured Finance. However, the potential credit exposure of the issuer towards the Italian account bank is not expected to be material.

Key rating drivers

Portfolio concentrated in the north of Italy (positive). The portfolio is mostly concentrated in the north of Italy (83.8% of GBV), which benefits from the country’s most dynamic economic conditions and, in general, the most efficient tribunals.¹

Below average seasoning for secured and unsecured exposures (positive). The seasoning of secured and unsecured exposures is respectively 3.8 and 4.4 years; this is below the average of peer transactions rated by Scope¹.

Hedging structure (positive). Interest rate risk on the class A notes is mitigated through a cap spread hedging structure, which applies an increasing upper bound rate to six-month Euribor ranging from 0.6% to 3.75%, and an increasing lower bound rate ranging from 0% to 0.7%. The terms and conditions also contain a cap on the interest rate for Class A notes, which is aligned with the upper band of the cap sread. The cap spread notional schedule is generally aligned with our expected amortisation profile on the Class A note. Interest rate risk on class B notes is not hedged, but it is mitigated by Euribor component ranking junior to Class A principal.²

Material portion of legal proceedings in initial stages (negative). Around 63.5% of the secured loans are in the initial legal phase or are yet to have proceedings initiated. This is above the average compared to peer transactions ¹.

Above average share of loans with high loan-to-values (negative). Secured loans with a loan-to-value higher than 200% represent a share of 30.2% of GBV; this is above the average of peer transactions rated by Scope¹.

Above average concentration of top 100 borrowers (negative). Top 100 borrowers represent ca. 35% of portfolio’s GBV, which is higher than the average of peer transactions rated by Scope¹.

Rating-change drivers

Rapid economic growth following the pandemic crisis (upside). A scenario of rapid economic recovery would improve liquidity and affordability conditions and would prevent a sharp deterioration of collateral values. This could positively affect the rating, enhancing servicer performance on collection volumes.

Servicer outperformance on recovery timing (upside). The pandemic led to the temporary suspension of courts’ activity. If courts advance on legal proceedings backlogs faster than expected, an outperformance on recovery timing could occur. This could positively impact the rating.

Long lasting pandemic crisis (downside). Recovery rates are generally highly dependent on the macroeconomic climate. Scope baseline scenario foresees³ a 7.5% gross domestic product contraction in 2020 (with downside risk on this estimate), before a recovery of +4.5% in 2021. If current crisis will last beyond Scope baseline scenario, liquidity conditions could deteriorate, reducing servicer performance on collection volumes. This could negatively impact the rating.

Servicer underperformance on recovery timing (downside). Servicer performance below Scope’s base case collection timing assumptions could negatively impact the rating.

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 considered that unsecured borrowers were classified as defaulted for a weighted average of 4.4 years as of the cut-off date of 31 March 2019. Scope accounted for the current macro-economic scenario, taking a forward looking view on the macro-economic developments.

For the class A notes analysis, Scope assumed a gross recovery rate of 34.0% over a weighted average life of 5.1 years. By segment, Scope assumed a gross recovery rate of 47.7% for the secured portfolio and 8.9% for the unsecured portfolio. Scope has applied an average combined security value haircut of 51.6%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 43.4% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (14.5% 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.

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.

Rating driver references
1 Portfolio datatape (confidential)
2 Transaction documents (confidential)
3 Scope revises the Outlook on Italy’s BBB+ long-term ratings to Negative

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 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 this rating are the Non-Performing Loan ABS Rating Methodology (3 September 2019) and the Methodology for Counterparty Risk in Structured Finance (24 July 2019). All documents are available on https://www.scoperatings.com/#!methodology/list.
The model used for this rating Cash Flow Model v1.1. 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.
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 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. 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, 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: Rossella Ghidoni, Associate Director.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The rating was first released by Scope on 17 June 2020.

Potential conflicts*
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings. A member of the Board of Trustees of Scope Foundation has a significant relationship with Société Generale SA, a related third party to this transaction. The Scope Foundation is a 20% shareholder of Scope Management SE, the general manager of Scope SE & Co KGaA (“Scope Group”). Scope Foundation has no financial or economic interest in Scope SE & Co KGaA and the main function of the foundation is to preserve the European identity of the shareholder structure of Scope Group.

*Editor's note: This section was amended on 28 September 2021. On the publication date of 17 June 2020, the section originally stated: "Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings."

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