Rating actions

The transaction comprises the following instruments:

Class A (ISIN IT0005356925), EUR 443.57m: downgraded to BBB-_SF from BBB_SF;

Class B (ISIN IT0005356933), EUR 60.13m: downgraded to B_SF from B+_SF;

Class J (ISIN IT0005356941), EUR 20.04m: not rated

Scope’s review considered the l investor and servicer reporting as of the third interest payment date of July 2020.

Transaction overview

BCC NPLs 2018-2 S.r.l. is a static cash securitisation of secured and unsecured NPLs, accounting for 58.4% and 41.6% in terms of original gross book value (“GBV”). The loans were mostly extended to companies (79.1%) rather than individuals (20.9%). The transaction was closed on 20 December 2018.

As of 31 July 2020, cumulative gross collections since closing stood at EUR 71.3m, which represents 76.6% of the expected cumulative gross collections of the original business plan. Around 90.9% of gross collections stem from open debtors (i.e., debtors for which the recovery process is still ongoing). Main sources of gross collections are judicial proceeds (52%) and discounted pay-off (‘DPO’) proceeds (18%). The remainder 30% is related to other unspecified or not allocated type of collections. Closed borrowers (i.e., debtors for which the recovery process was concluded) account for 9.1% of gross collections and represent 1.4% of total borrowers of the portfolio as of closing.

Scope has observed a misalignment in the definition of the NPV profitability ratio in transaction’s documents¹, as the numerator is not aligned across documents regarding the date, which is referenced for discounting purposes. The attachment E of the servicing agreement envisages that the numerator is computed using the transaction’s transfer date (7 December 2018), while the intercreditor agreement and the servicing agreement definitions envisage that the numerator shall be computed using the transaction selection date (31 March 2018) for discounting purposes. The servicer is computing the ratio based on the attachment E of the servicing agreement. The impact is currently non material for the transaction.

Scope has observed a misalignment in the computation of the cumulative net collection ratio for the first two interest payment dates. The servicer computed the ratio deducting from the numerator both recovery expenses and servicing fees, while the transaction’s documents envisage that only recovery expenses shall be deducted from the numerator. The ratios computed by the servicer at the first two interest payment dates (126.24% and 100.39%) are lower than the correct ratios (135.04% and 109.26%). The impact is not material for the transaction as no triggers are hit with any of the two ratios levels.

The monitoring agent reported minor differences regarding base fees computation and closed borrowers reporting.

Scope deems that the impact of the above misalignments is currently not material for the transaction. However, it will closely monitor the computations referenced above.

Rating rationale

The rating action is driven by Scope’s updated modelling assumptions, which reflect Scope’s view on the current and developing macro-economic factors.

In particular, Scope factors in expected property price declines of about 5% in the short term. Scope expects base case lifetime collections (B rating category) to be around 7.0% lower compared to the amount forecast at closing. Scope also factors in an average collections delay of one year.

The rating action is also driven by the observed and expected performance of the transaction. As of the last interest payment date, cumulative net collections (gross collections net of recovery expenses), amount to EUR 66.6m, which equals 75.2% of the original business plan net expectations of EUR 88.6m. The NPV profitability ratio equals 154.1%. Interests on class B are subordinated to payment of class A principal if either the net cumulative collection ratio or the NPV profitability ratio fall below 80% of the servicer’s business plan targets. Therefore, a class B interest subordination event has occurred.

An underperformance event occurs if either the net cumulative collection ratio or the NPV profitability ratio are below 85%. Therefore, a servicer underperformance event occurred.

The ratings also address exposures to the key transaction counterparties: doValue S.p.A. 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, as the issuer’s account bank, agent bank, paying agent and cash manager; and UniCredit Bank AG and JP Morgan AG as the cap counterparties. All counterparties continue to be supportive for the ratings.

Key rating drivers

Overperformance on closed positions (positive): As of the latest reporting date, profitability on closed borrowers stood at 100% relative to Scope original base case scenario. In comparison with the original business plan, the profitability of closed borrowers was 118%.

Liquidity (positive): The liquidity protection is robust, with the cash reserve covering around 15 months, as of the current interest payment date.

Italian economy (negative): The Italian economy faces a deep recession in 2020 fueled by the Covid-19 pandemic². Despite governmental support measures, increased collateral liquidity risk and weakened borrower liquidity positions negatively affect the recovery prospects.

Higher than expected recovery costs (negative): Recovery expenses have been 3% higher than the servicer’s expectations. Recovery costs amount to 6.5% of gross collections, ranking among the highest costs of Italian NPL transactions rated by Scope.

Rating-change drivers

Positive. Consistent servicer outperformance in terms of recovery timing and the total amount of collections could positively impact the rating.

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

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.

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 considered a lifetime gross recovery rate of 38.0% over a portfolio’s weighted average life of 7.3 years. The class B rating scenario considered a recovery rate of 42.4% over a portfolio’s weighted average life of 6.9 years.

By portfolio segment, Scope assumed a class A gross recovery rate of 52.3% and 15.1% for the secured and unsecured portfolios, respectively. Scope assumed a class B gross recovery rate of 58.1% and 17.6% for the secured and unsecured segments, respectively. Scope also captures idiosyncratic risk by applying rating-conditional recovery rate haircuts to the 10 largest borrowers.

Sensitivity analysis

Scope tested the resilience of the ratings to deviations in expected recovery rates and recovery timing. This analysis has the sole purpose of illustrating the sensitivity of the ratings 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: four notches decrease;
• a one-year recovery lag increase: two notches 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: two notches decrease;
• a one-year recovery lag increase: one notch decrease.

Rating driver references
1. Confidential transaction documents
2. 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, 'General Structured Finance Methodology' published on 18 December 2019 and its ‘Methodology for Counterparty Risk in Structured Finance’ published on 8 July 2020. 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: the issuer, public domain, 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 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: Rossella Ghidoni, Associate Director
Person responsible for approval of the rating: David Bergman, Managing Director
The rating was first released by Scope on 20 December 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
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.