Scope downgrades Class A and Class B notes issued by BCC NPLs 2018 S.r.l. – Italian NPL
Scope has reviewed the performance of BCC NPLs 2018 S.r.l., a static cash securitisation of a portfolio of Italian non-performing loans originated by 21 Italian cooperative banks coordinated by Iccrea S.p.A. and 2 banks belonging to ICCREA Banca S.p.A.
The transaction comprises the following instruments:
Class A (ISIN IT0005338717), EUR 236m: downgraded to BB-SF from BBB-SF;
Class B (ISIN IT0005338741), EUR 31.4m: downgraded to CCSF from B+SF;
Class J (ISIN IT0005338758), EUR 10.5m: not rated
Scope’s review considered the latest available payment information, along with investor and servicer reporting as of June 2020.
BCC NPLs 2018 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 21 Italian cooperative banks coordinated by Iccrea S.p.A. and two banks belonging to ICCREA Banca S.p.A. The transaction closed on 10 July 2018 and the legal maturity is in June 2038.
As of 31 May 2020, aggregate gross collections stood at EUR 72.9m, which represents 79.4% of the original business plan expectations of EUR 91.8m by the current period. Around 48% of gross collections (EUR 35m) were made from open debtors (i.e. debtors for which the recovery process is still ongoing). Main sources of gross collections are judicial proceeds (44%), note sale proceeds (29%), discounted pay-off (‘DPO’) proceeds (26%) and other unspecified type of collections (1%). Fully resolved borrowers account for 7.2% of all borrowers.
Cumulative net collections (gross collections net of recovery expenses), amount to EUR 68.6m, which equals 81% of the original business plan expectations of EUR 85.2m.
At the latest reporting date, around 16.3% of the class A notes’ notional has amortised. However, as a significant share of the underlying pool’s gross book value now corresponds to positions on which no new collections are expected (i.e. closed debtors), class A credit enhancement relative to the portfolio’s outstanding gross book value has only increased slightly from 73% to 73.6%.
Interest on class B are subordinated to payment of class A principal if either 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 (June 2020), the net cumulative collection ratio and the NPV profitability ratio are at 81% and 92%, respectively. Therefore, a class B interest subordination event has occurred.
The rating action is driven by collections being lower than Scope’s expectations at closing and Scope’s updated modelling assumptions, which reflect the agency’s view that the consequences of Covid-19 will weigh negatively on the transaction’s performance going forward. In particular, we factor in expected property price declines of about 5% in the short term, an average delay in collections of at least one year and potentially lower unsecured recovery proceeds. As a result, Scope expects base case lifetime collections (B rating category) to be around 15.2% lower compared to the amount forecast at closing.
In the most recent business plan, remaining gross collections have been revised downwards (7%) compared to the initial business plan. 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; JP Morgan as interest rate cap provider. All counterparties continue to be supportive for the ratings.
Key rating drivers
Underperformance on closed positions (negative): As of the latest reporting date, profitability on closed borrowers stood at 86%2 relative to original business plan forecasts. This is among the lowest for Italian NPL transactions rated by Scope.
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 the recovery prospects.
Low profitability on notesales (negative): Notesales have been an important recovery strategy for the servicer, accounting for 29%2 of gross collections so far. However, some large positions have been sold at a significant discount to the amounts forecast in the original business plan. A continuation of this trend may lead to front-loaded but lower nominal collections and cause significant losses for mezzanine noteholders.
Property sales (negative): The special servicer has managed to sell 649 properties via auction since closing of the transaction, almost all linked to open debtors. The aggregated sale amount is significantly lower than the market value of corresponding properties and this gap must be monitored in the context of future property sales1.
Lower than expected recovery costs (positive): Recovery expenses have been significantly lower than the servicer’s expectations, as well as Scope’s modelling at closing. Thus far, cumulative recovery costs were 39% lower than original business plan forecast. As a result, the servicer now expects lifetime recovery expenses to be 28% below the initial business plan.
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 stands at 5% of the current outstanding balance of the Class A notes. This protects the liquidity of senior noteholders, covering senior expenses and interest on class A notes for about four payment dates.
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. Continued below expected 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.
Scope has updated its modelling assumptions to reflect the current performance of the transaction. The class A rating scenario incorporated a lifetime gross recovery rate of 38.6% over a weighted average life of 6.6 years. The class B recovery rate of 40.7% was considered over a weighted average life of 6.5 years.
By portfolio segment, Scope assumed a class A gross recovery rate of 49.4% and 12.6% for the secured and unsecured portfolios, respectively. Scope assumed a class B gross recovery rate of 52.2% and 13.2% for the secured and unsecured segments, respectively. Scope also captures idiosyncratic risk by applying rating-conditional recovery rate haircuts to the 10 largest borrowers.
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 model rating outcome in the event of:
10% haircut to recoveries: two notches decrease;
- a one-year recovery lag increase: stable.
The following shows how the results for class B notes change compared to the model rating outcome in the event of:
10% haircut to recoveries: two notches 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 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.
The methodologies used for this rating were Scope’s ‘Non-Performing Loan ABS Rating Methodology’ published on 3 September 2019, 'General Structured Finance Methodology' published on 18 December 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(s) 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.
This credit rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Martin Hartmann, Associate Director
Person responsible for approval of the rating: Antonio Casado, Executive Director
The rating was first released by Scope on 10 July 2018.
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.
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