Rating actions

The transaction comprises the following instruments:

Class A (ISIN IT0005356040), EUR 130,625,097: downgraded to BB+_SF from BBB-_SF

Class B (ISIN IT0005356057), EUR 30,000,000: downgraded to CCC_SF from B+_SF

Class J (ISIN IT0005356065), EUR 10,000,000: not rated

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

Transaction overview

Riviera NPL S.r.l. is a static cash securitisation of secured and unsecured non-performing loans (NPLs) extended to companies and individuals in Italy with an original gross book value (GBV) of EUR 963.3m. The portfolio is serviced by Italfondiario S.p.A. as special servicer and Credito Fondiario S.p.A. as master and special servicer. The transaction closed on 17 December 2018, with its legal maturity falling in July 2036.

As of 30 June 2020, cumulative gross collections (EUR 59.3m) are 107.3% of the original business plan, while cumulative net collections (EUR 57.9m) are 112.7% of the original business plan. The sources of total gross collections are split between discounted pay-off (‘DPO’) proceeds (35.2%), notesales (33.3%), judicial proceeds (25.0%), and other sources of collections (6.5%). Closed borrowers (i.e. borrowers for which the recovery process has fully concluded) represent 49.2% of gross collections. The reported net present value cumulative profitability ratio on closed positions is 104.9%.

25.4% of the Class A notional balance has amortised since closing. As a result, the Class A notes’ outstanding balance relative to outstanding GBV has decreased to 15.3% from 18.2% at closing.

Rating rationale

The rating action is mainly driven by Scope’s updated modelling assumptions, which reflect the agency’s view that the consequences of Covid-19 will weigh negatively on transaction performance going forward. Key updates include expected property price declines of about 5% in the short term and potentially lower secured recovery proceeds due to an increase in the fire-sale discounts applied. Scope expects base case lifetime collections (B rating category) to be 15.9% lower compared to the gross expected collections forecasted at closing.

Realised cumulative gross collections through three payment dates are 1.7x Scope’s original BBB- scenario expectations. This can be in a large part attributed to notesales accounting for EUR 19.6m of collections related to the largest borrower. Realised collections from closed positions are 73.3% of Scope’s original BBB- scenario expectations.

The Class B interest subordination trigger thresholds have not yet been breached. Class A principal repayments are senior to all Class B interest payments if either the cumulative collection ratio or the present value profitability ratio fall below 90% of the original business plan.

Editorial Note: The Press Release / Rating Action was updated on 17th December 2020 3:15pm after the original release on 17th December 2020, 11:35am.

Relevant transaction counterparties are: i) Credito Fondiario S.p.A. and Italfondiario S.p.A., the servicers (Credito Fondiario is also master servicer); ii) Securitisation Services S.p.A., the back-up master servicer; iii) BNP Paribas Securities Services, Milan Branch, account bank, agent bank, cash manager and principal paying agent; and iv) JP Morgan AG as interest rate cap provider. All counterparties continue to support the ratings.

Key rating drivers

Collection pace¹ (positive): as of the latest reporting date, cumulative gross recoveries for the entire portfolio were 154% of Scope original base case scenario.

Lower than expected recovery costs¹ (positive): recovery expenses have been 62.3% lower than the servicer’s expectations. Recovery costs amount to 2.5% of gross collections, ranking among the lowest costs of Italian NPL transactions rated by Scope.

Italian economy² (negative): 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 3.5% of the portfolio’s total borrowers as of closing) is 73.3% relative to Scope’s original BBB- 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 26.4% over a portfolio’s weighted average life of 4.9 years. The class B rating scenario considered a recovery rate of 29.8% over a portfolio’s weighted average life of 4.6 years.

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: one notch decrease;
• a one-year recovery lag increase: zero 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: zero 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 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, 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 received a third-party asset audit at closing. The external asset audit 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: Adam Plajner, Senior Analyst
Person responsible for approval of the rating: David Bergman, Managing Director
The rating was first released by Scope on 17 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
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