Rating actions

The transaction comprises the following instruments:

Class A (ISIN IT0005351884), EUR 354,799,390: downgraded to BBB-_SF from BBB_SF;

Class B (ISIN IT0005351892), EUR 50,000,000: downgraded to B-_SF from B_SF;

Class J (ISIN IT0005351900), EUR 15,780,000: not rated

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

Transaction overview

PoP NPLs 2018 S.r.l. is a static cash securitisation of secured and unsecured NPLs, accounting for 53.9% and 46.1% in terms of original gross book value (“GBV”). The loans were mostly extended to companies (77.1%) rather than individuals (22.9%). The transaction was closed on 16 November 2018.

As of 31 March 2020, cumulative gross collections since closing stood at EUR 103.5m, which represents 14.5% of the expected lifetime cumulative gross collections of the original business plan. Around 76.4% of cumulative 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 (36.7%), discounted pay-off (‘DPO’) proceeds (21.7%) and notesales (7.3%). The remainder 34.3% 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 23.6% of cumulative gross collections and represent 3.6% of total borrowers of the portfolio as of closing. Transaction’s Net Present Value Cumulative Profitability Ratio stands at 100.7% as of the latest reporting date.

Rating rationale

The rating action is driven by:

• Scope’s updated modelling assumptions, which also reflect Scope’s view on the short to medium real estate market developments.
   
• Current performance, where collections have so far outpaced Scope timing assumptions.

The ratings also address exposures to the key transaction counterparties, where no material change has occurred with reference to the counterparty risk.

Key rating drivers

Overperformance in collections¹ (positive): as of the latest reporting date, cumulative gross recoveries for the entire portfolio were 135% of Scope original base case scenario.

Liquidity (positive)¹: The liquidity protection is robust, with the cash reserve covering around 26 months, as of the current interest payment date.

Italian economy (negative)²: The Italian economy faces a deep recession in 2020 fueled by the Covid-19 pandemic. Despite governmental support measures, increased collateral liquidity risk and weakened borrower liquidity positions negatively affect the recovery prospects.

Underperformance on closed positions (negative)¹: as of the latest reporting date, profitability on closed borrowers (that represent 3.6% of portfolio’s total borrowers as of closing) is 74% relative to Scope original base case scenario.

Rating-change drivers

Positive. Consistent servicer outperformance on closed borrowers profitability, could positively impact the ratings.

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 ratings.

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 38.8% over a portfolio’s weighted average life of 6.6 years. The class B rating scenario considered a recovery rate of 42.7% over a portfolio’s weighted average life of 6.2 years.

By portfolio segment, Scope assumed a class A gross recovery rate of 63.7% and 10.6% for the secured and unsecured portfolios, respectively. Scope assumed a class B gross recovery rate of 69.9% and 12.0% for the secured and unsecured segments, respectively.

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: three 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: two notches decrease;
• a one-year recovery lag increase: one notch decrease.

Rating driver references
1. Servicing, investor, payment reports.
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 9 September 2020, 'General Structured Finance Methodology' published on 29 October 2020 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 16 November 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.