Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005337446), EUR 203.5m: A-_SF; under review for downgrade

Class B (ISIN IT0005337479), EUR 13m: downgraded to B+_SF from BB-_SF; under review for downgrade

Class J (ISIN IT0005337487), EUR 8m: not rated

Scope’s review considered the latest available payment information, along with investor and servicer reporting as of January 2020.

Transaction overview

4Mori Sardegna S.r.l. is a static cash securitisation of secured and unsecured non-performing loans (NPLs) that were extended to companies and individuals in Italy. The loans were originated by Banco di Sardegna S.p.A. The transaction closed on 22 June 2018 and the legal maturity is in January 2037.

As of 31 December 2019, aggregate gross collections were EUR 52.3m, which represents 88.2% of the original business plan expectations of EUR 59.3m. Around 65% of gross collections (EUR 34m) come from open debtors (i.e. debtors for which the recovery process is still ongoing). Sources of gross collections are discounted pay-off (‘DPO’) proceeds (29%), judicial proceeds (24%), note sale proceeds (18%) and other non-specified type of collections (29%). Fully resolved borrowers account for 2.6% of all borrowers.

Cumulative net collections (gross collections net of recovery expenses), amount to EUR 50.1m, equal to 108% of the original business plan’s expectations of EUR 46.9m.

Around 12.5% 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 slightly increased to 79.1% from 77.8%.

Interest on class B are subordinated to payment of class A principal if the net cumulative collection ratio falls below 90% of the servicers’ business plan target or the NPV profitability ratio falls below 90%. This ratio is curable, and once is cured, all accrued and unpaid interest are distributed senior to Class A principal payments.

According to the data provided by the servicer for the last payment date (January 2020), the net cumulative collection ratio and the NPV profitability ratio are at 107% and 134%, respectively. Therefore, a class B interest subordination event has not occurred and EUR 1.6m of interest have been distributed to class B noteholders since closing.

However, Scope’s has observed a misalignment between the definition of the cumulative collection ratio in the documents and the cumulative collection ratio reported in the servicing report.

According to documentation the net cumulative collection ratio is defined as the ratio between (i) cumulative gross collections since cut-off date less recovery expenses and (ii) net expected collections where net expected collections are calculated as the difference between (1) gross expected collections and (2) expected recovery expenses and servicing fees. Scope understands that the special servicer is purposely not subtracting servicing fees only in the denominator of the cumulative collection ratio, as they consider that the definition of net expected collections should not contain any reference to servicing fees, which would artificially inflate the cumulative collection ratio. Scope also acknowledges that the different parties involved in the transaction are aware of this inconsistency and are actively seeking a solution.

Rating rationale

The rating action is driven by Scope’s updated modelling assumptions, which reflect the current and developing macro-economic factors, as well as the observed and expected performance of the transaction. Scope also compared the transaction’s performance to its own recovery assumptions, in the current macro-economic context, regarding asset resolution timing and recovery estimates developed through transaction-specific observations and benchmarking. Specifically, Scope expects base case lifetime collections (B rating category) to be around 14% lower compared to the amount forecasted at closing.

In the most recent business plan, remaining gross collections have been reviewed upwards (2%) compared to the initial business plan, with a significant share of expected unsecured recoveries backloaded to 2025. The adjustments made to the business plan do not impact Scope’s own recovery assumptions;

The ratings also address exposures to the key transaction counterparties: Prelios Credit Servicing S.p.A. (Prelios) as servicer; Securitisation Services S.p.A. as back-up master servicer, corporate services provider, representative of the noteholders, and calculation agent; Zenith Service S.p.A. as monitoring agent; BNP Paribas Securities Services, Milan Branch as account bank; Banca IMI S.p.A. as interest rate cap provider. All counterparties continue to be supportive for the ratings.

Key rating drivers

Property sales (negative). The special servicer has managed to sell 249 properties via auction since closing of the transaction, all linked to open borrowers. The aggregated sale amount is lower than the market value of the related properties and such gap should be monitored in the context of future property sales.

Italian economy (negative). 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 the recovery prospects.

Concentrated portfolio (negative). The 10 and 100 largest debtor exposures respectively account for 7.3% and 24.9% of the portfolio’s outstanding gross book value. Location (negative). The portfolio is heavily concentrated in Sardinia’s metropolitan and non-metropolitan areas, which are less economically dynamic, and have generally less efficient tribunals compared with other Italian regions.

Mezzanine notes tranche thinness (negative): The class B notes are very sensitive to changes in the underlying asset assumptions, because the size of the tranche is very small relative to the size of the portfolio (1.2% of original GBV). This implies that a small decrease or delay in portfolio collections may lead to significant mezzanine noteholder losses

Above-average collateralisation (positive). The class A and class B notes benefit from credit enhancement levels of 79.1% and 77.8% respectively (calculated as a percentage of gross book value) which are high compared to those in peer transactions rated by Scope.

Net cumulative collections (positive). Based on Scope’s analysis, observed net collections are outperforming the original business plan expectations (108%) as of 31 December 2019, i.e. three collection periods since closing. This is mainly driven by lower-than-expected recovery expenses of EUR 2.2m since closing.

Tight performance triggers (positive). The triggers protect senior noteholders. For as long as the special servicer does not meet at least 90% of the business plan’s collection schedule, class B interest payments will become subordinated below class A principal.

Liquidity protection (positive): The cash reserve target amount is set at 4.9% of the outstanding notes, representing 5.2% of class A. This is among the highest for Italian NPL transactions. It protects the liquidity of senior noteholders, covering senior expenses and interest on class A notes for about 3.5 payment dates.

Rating-change drivers

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

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.

Positive. A decrease in legal expenses could positively affect the rating.

Positive. Consistent servicer outperformance in terms of recovery timing and the total amount of collections could positively impact 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. The concentration in Sardegna has been addressed by an additional market value decline haircut for the assets located in the region.

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 37.2% over a weighted average life of 7.8 years. The class B recovery rate of 44.3% was considered over a weighted average life of 7.3 years.

By portfolio segment, Scope assumed a class A gross recovery rate of 62.6% and 5.8% for the secured and unsecured portfolios, respectively. Scope assumed a class B gross recovery rate of 69.4% and 6.5% for the secured and unsecured segments, respectively. Scope captured idiosyncratic risk by applying rating-conditional recovery rate haircuts to the 10 largest borrowers.

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, two notches 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:

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

Rating driver references

1 Confidential documents of 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 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.

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 56, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Cyrus Mohadjer, Analyst
Person responsible for approval of the rating: David Bergman, Managing Director
The rating was first released by Scope on 22 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
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