The rating actions are as follows:

Class A (ISIN IT0005413197), EUR 320,000,000: rated BBB_SF

Class B (ISIN IT0005413213), EUR 20,000,000: not rated

Class J (ISIN IT0005413221), EUR 3,400,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 1,377m by gross-book value (’GBV’). The portfolio was originated by BPER Banca S.p.A., Banco di Sardegna S.p.A and Cassa di Risparmio di Bra S.p.A. Prelios Credit Servicing S.p.A. has been appointed as master and special servicer.

The pool is composed of senior secured (52.5%), unsecured (42.4%) and junior secured loans (5.1%). Borrowers are mainly corporates (88.9%). Secured loans are backed by first-lien mortgages on residential properties (32.8% of property values), commercial assets (22.1%), land (14.7%) and industrial assets (12.4%), while the remainder collateral (18.0%) is composed of other type of properties. More than half of the properties is concentrated in the southern regions of Italy, including islands (52.5%), followed by northern (39.2%) and central (8.3%) regions. The issuer acquired the portfolio on 1 June 2020.

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 9.5%. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes.

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, or public ratings.

Key rating drivers

High share of drive-by valuations (positive). Most of the portfolio’s collateral appraisals are either full or drive-by valuations (74.3%), which are generally more accurate than desktop or CTU valuations.¹

Liquidity protection (positive). An amortising cash reserve covering senior expenses and interest on class A notes represents 5% of the outstanding class A notes’ balance. This level of liquidity protection for senior noteholders is high compared to peer transactions rated by Scope.²

Class B interest deferral trigger (positive). Class B interest payments will be fully deferred if the special servicer does not meet at least 95% of the original business plan target, in terms of cumulative net collections and profitability on closed positions. This protective trigger is the tightest relative to peer transactions rated by Scope.²

Interest rate risk hedged (positive). Interest rate risk on the class A notes is mitigated through a cap spread hedging structure, with an increasing upper bound rate applied to class A base rate, ranging from 0.20% to 1.60%, and a constant lower bound rate equal to 0.10%. The cap spread notional schedule is above our expected amortisation profile of class A notes.²

High volume of collections since cut-off date (positive). Collections received since portfolio cut-off date amount to EUR 86.3m, which represents around 20% of Scope’s expected lifetime collections, and they will be part of the issuer’s available proceeds at the first payment date. These collections will not be considered for the calculation of the servicing fees.¹

Property type (negative). The share of land and properties classified as ‘other’ is high compared to peer transactions (14.7% and 18.0%, respectively). Properties classified as ‘other’ include mostly hotels (8.0%) and buildings under construction (5.6%).¹

Material portion of legal proceedings in initial stages (negative). Around 67% of the secured loans are in the initial legal phase or are yet to have proceedings initiated. This results in a longer expected time for collections than for loans in more advanced phases.¹

Low granularity (negative). The concentration in the portfolio is above market average considering peer transactions rated by Scope. The 10 and 100 largest borrower exposures account for 11.5% and 39.7% of portfolio GBV, respectively.¹

Seasoned unsecured portfolio (negative). The weighted average time since default is approximately 4.9 years for the unsecured portfolio. Most unsecured recoveries are realised in the first years after a default according to historical data.¹

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 scenario³ foresees 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 4.9 years as of the cut-off date of 30 September 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 32.4% over a weighted average life of 5.4 years. By segment, Scope assumed a gross recovery rate of 53.1% for the secured portfolio and 9.5% for the unsecured and junior secured portfolio.

Scope has applied an average combined security value haircut of 54.9%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 47.5% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (14.1% 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 issue date.

In its analysis, Scope considered the actual servicer fees structure and assumed legal expenses to be around 9% of lifetime gross collections. Scope captured single asset exposure risks by applying a recovery rate haircut of 15% 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 one notch.
   
• an increase in the recovery lag by one year, zero notches.

Rating driver references
1 Loan-by-loan data tape of the securitised pool (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, agents of the issuer, 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. 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: Leonardo Scavo, Analyst.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The rating was first released by Scope on 18 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 18 June 2020, this 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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