Rating action

Scope Ratings has today upgraded the senior tranche to A-_SF from BBB+_SF.

Transaction overview

The financial guarantee provided by the European Investment Fund (EIF) to Banca di Credito Popolare S.C.p.A. in Torre del Greco (BCP) is an EU-sponsored risk transfer transaction of Italian SME credit rights, in the context of the European Investment Bank (EIB) Group SME Initiative for Italy. The credit rights were originated and will be serviced by BCP under the supervision of the EIF. Under the financial guarantee, 50% of losses incurred from the reference portfolio can be claimed by BCP from the EIF. The guarantee terminates on 30 September 2032.

Rating rationale

The rating upgrade is mainly driven by the better-than-expected performance of the transaction and structural deleveraging. Amortisation is in line with Scope’s expectation. The rating action however also accounts for the economic uncertainty spurred by the Covid-19 pandemic and the general economic slow-down in the Eurozone.

The rating also continues to reflect the legal and financial structure of the transaction as defined in the guarantee agreement; the credit quality of the underlying portfolio in the context of the macroeconomic conditions in southern Italy; the servicing capabilities and incentives of BCP; and the limited counterparty exposure to BCP upon the recovery of defaulted assets. The rating also takes into account the contractual rights granted to the EIF and the existence of an external verification agent to verify the accuracy of the loss claims.

Key rating drivers

Increased credit enhancement (positive)¹. Senior tranche credit enhancement increased to 26.5%, from 22.9% as at the initial rating assignment (adjusted for expected losses).
Obligor performance (positive)¹. 90-days-past-due and defaulted loans collectively represent 2.5% of the initial portfolio as of 30 March 2020, which is better than Scope’s initial expectation.

Alignment of interests and transaction process supervision (positive)1. BCP must maintain a minimum economic interest of 5% in each exposure it has assigned to the SME Initiative. In addition, the guarantee can be terminated if BCP deviates materially from its internal credit and collection policies.

Efficient guarantee mechanics (positive)¹. The loss claims under the guarantee are based on an expected loss calculation, which minimises cash flows between BCP and the EIF and significantly reduces the counterparty risk exposure to BCP.

Asset credit quality (negative)¹. Scope assumes the average credit quality of the portfolio to be commensurate with B. This reflects the high lifetime default rate, partially offset by recovery expectations.

Significant obligor concentration (negative)¹. The share of top obligors (exposure at more than 0.5%) in the portfolio remains high and increases to 61.0% as of 30 March 2020 from 56.2% at last review.

Performance data (negative)¹. Historical performance data presented to Scope at closing lacked granularity and covered a relatively short span. Scope has therefore also considered BCP’s loss-given-default estimates as well as market data.

Italian economy (negative)². Covid-19 had a significant economic impact on the Italian economy. The gross domestic product annual growth rates for Q1 and Q2 2020 were at -5.5 and -17.3%, respectively. We believe that government measures supported by payment moratorium measures from the banks partially mitigate the adverse impact. However, uncertainty remains, which we reflect in our assumptions and the rating action.

Rating-change drivers

Positive. A fast recovery of the Italian macroeconomy, particularly in southern regions, could lower expected defaults in the transaction.

Positive. Faster-than-expected portfolio amortisation, due to high prepayments, would result in credit enhancement build-up and may positively impact the rating.

Negative. Significantly worse-than-expected asset performance, e.g. in terms of recovery or default rates, is among the factors that could negatively impact the rating.

Quantitative analysis and assumptions

Scope applied its large homogenous portfolio approximation approach when analysing the granular collateral pool. The agency considered a portfolio amortisation and loss allocation analysis of the tranches as described under the guarantee. Scope’s analysis considered the two portfolio segments as of 30 March 2020: secured (61.3%) and unsecured (38.7%).

Scope expects a portfolio lifetime mean default rate of 28.6% and coefficient of variation of 57.4%, taking into consideration the latest portfolio segmentation.

Defaults are defined as i) loans that are 90 days past due; ii) loans subject to acceleration; iii) a restructuring of the credit right; or iv) a subjective default. A 58.1% rating-conditional recovery rate was assumed for the senior tranche. Scope analysed the transaction under high (10%) and low (0%) prepayment scenarios. The weighted expected life of the senior tranche is 1.3 years under low prepayment scenario.

Sensitivity analysis

Scope tested the resilience of the assigned rating against deviations of the main input parameters: the portfolio mean-default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the assigned rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the results for the senior tranche change compared to the assigned rating when the portfolio’s expected default rate increases by 50%, or the portfolio’s expected recovery rate decreases by 50%:

• Sensitivity to default rate assumption, zero notches; sensitivity to recovery rates, -4 notches.

Rating driver references
1. Bespoke reporting and documentation from the arranger
2. IStat Statistical Bureau of Italy  

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 1.0 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(s) (SME ABS Rating Methodology, 26 May 2020; Methodology for Counterparty Risk in Structured Finance, 8 July 2020) are available on https://www.scoperatings.com/#!methodology/list.
The model used for this rating Scope Cash Flow SF EL Model Version 1.0 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/or 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, 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 ratings 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 not received a third-party asset due diligence assessment/asset audit. However, material misrepresentation leads to loss claims being void. Default/Loss cases will be checked by external verification agent. Scope has performed its own analysis of the data quality, based on information received from the rated entity or related third parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The external due diligence assessment/asset audit/internal analysis 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: Sebastian Dietzsch, Director
Person responsible for approval of the rating: David Bergman, Managing Director
The ratings were first released by Scope on 20 December 2018. The ratings were last updated on 18 September 2019.

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.

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