Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005337446), EUR 191.5m: downgraded to BBB+ _SF from A-_SF

Class B (ISIN IT0005337479), EUR 13m: downgraded to B_SF from B+_SF

Class J (ISIN IT0005337487), EUR 8m: not rated

Scope’s review considered the latest available payment information, along with investor and servicer reporting as of September 2020.

Transaction overview

4Mori Sardegna 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 Banco di Sardegna S.p.A. The transaction closed on 22 June 2018 and the legal maturity is in January 2037.

As of 30 June 2020, aggregate gross collections were EUR 70.5m, which represents 81.4% of the original business plan expectations of EUR 86.6m. Around 55.5% of gross collections (EUR 39m) come from open debtors (i.e. debtors for which the recovery process is still ongoing). Sources of gross collections are discounted pay-off (‘DPO’) proceeds (33%), judicial proceeds (28%), note sale proceeds (27%) and other non-specified type of collections (12%).

Cumulative net collections (gross collections net of recovery expenses), amount to EUR 67.2m, equal to 95.5% of the original business plan’s expectations of EUR 70.3m.

Around 17.5% of the class A notes’ notional has amortised. As a result, class A credit enhancement relative to the portfolio’s outstanding gross book value has slightly increased to 79.6% from 77.8%.

Interest on class B are subordinated to payment of class A principal if 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 95.5% and 106.8%, respectively. Therefore, a class B interest subordination event has not occurred and EUR 2.1m of interest have been distributed to class B noteholders since closing.

However, as further explained in the press release published 19 June 2020, Scope’s has observed a misalignment between the definition of the cumulative collection ratio in the documents and the cumulative collection ratio reported in the servicing report and so far the transaction parties have not proposed a solution mitigate the inconsistency.

Rating rationale

The rating action is driven by Scope’s updated modelling assumptions, which reflect the current and developing macro-economic factors, as well as the observed and expected performance of the transaction. Scope also compared the transaction’s performance to its own recovery assumptions, in the current macro-economic context, regarding asset resolution timing and recovery estimates developed through transaction-specific observations and benchmarking. Specifically, Scope expects base case lifetime collections (B rating category) to be around 14% lower compared to the amount forecasted at closing.

In the most recent business plan, remaining gross collections have been reviewed upwards (2%) compared to the initial business plan, with a significant share of expected unsecured recoveries backloaded to 2025. The 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; Banca IMI S.p.A. as interest rate cap provider. All counterparties continue to be supportive for the ratings.

Key rating drivers

Above-average collateralisation (positive). The class A and class B notes benefit from credit enhancement levels of 79.6% and 77.8% respectively (calculated as a percentage of gross book value) which are high compared to those in peer transactions rated by Scope.

Recovery expenses (positive)¹: As of 30 June 2020, i.e. four collection periods since closing, we observe recovery expenses of EUR 3.3m since closing. This is significantly below initial business plan expectations (EUR 16.3m).

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 target amount is set at 4.9% of the outstanding notes, representing 5.2% of class A. This is among the highest for Italian NPL transactions. It protects the liquidity of senior noteholders, covering senior expenses and interest on class A notes for about 3.5 payment dates.

Property sales (negative)²: The special servicer has managed to sell 293 properties via auction since closing of the transaction, all linked to open borrowers. The aggregated sale amount is significantly lower than the market value of the related properties and such gap should be monitored in the context of future property sales.

Italian economy (negative)³: The Italian economy faces a deep recession in 2020 fuelled by the Covid-19 pandemic. Despite governmental support measures, increased collateral liquidity risk and weakened borrower liquidity positions negatively affect the recovery prospects.

Concentrated portfolio (negative): The 10 and 100 largest debtor exposures respectively account for 7.4% and 24.5% of the portfolio’s outstanding gross book value.

Location (negative): The portfolio is heavily concentrated in Sardinia’s metropolitan and non-metropolitan areas, which are less economically dynamic, and have generally less efficient tribunals compared with other Italian regions.

Mezzanine notes tranche thinness (negative): The class B notes are very sensitive to changes in the underlying asset assumptions, because the size of the tranche is very small relative to the size of the portfolio (1.2% of original GBV). This implies that a small decrease or delay in portfolio collections may lead to significant mezzanine noteholder losses

Rating-change drivers

Positive. A decrease in 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.

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. The concentration in Sardegna has been addressed by an additional market value decline haircut for the assets located in the region.

Scope has updated its modelling assumptions to reflect the current performance of the transaction. The class A rating scenario incorporated a gross recovery rate of 37.2% over a weighted average life of 7.8 years. The class B recovery rate of 44.3% was considered over a weighted average life of 7.3 years.

By portfolio segment, Scope assumed a class A gross recovery rate of 56.9% and 5.8% for the secured and unsecured portfolios, respectively. Scope assumed a class B gross recovery rate of 62.1% and 6.5% for the secured and unsecured segments, respectively. For the class A analysis Scope has applied an average combined security value haircut of 54.2%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 41.2% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (22.1% on average), reflecting Scope’s view of downside market volatility risk while for the class B analysis Scope has applied a combined security value haircut of 39.6% which consists of i) an average fire-sale discount (including valuation type haircuts) of 34.2%; and ii) property price decline stresses (8.3% on average). Scope captured idiosyncratic risk by applying rating-conditional recovery rate haircuts to the 10 largest borrowers.

Sensitivity analysis

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 assigned rating in the event of:

• 10% haircut to recoveries, two 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, one notch decrease;
   
• a one-year recovery lag increase, no impact.

Rating driver references
1. Confidential documents of issuer, arranger and originators
2. Confidential servicer reports
3. 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) and/or rating outlook(s), Cash Flow Model v1.1, 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 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: Cyrus Mohadjer, Senior Analyst
Person responsible for approval of the rating: David Bergman, Managing Director
The rating was first released by Scope on 22 June 2018. The ratings/outlooks were last updated on 19 June 2020.

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.