Rating action

Scope Ratings has today assigned final ratings to the notes issued by Yoda SPV, S.r.l., a cash securitisation of Italian non-performing loans originated by Intesa Sanpaolo S.p.A.

The rating actions are as follows:

Class A (ISIN IT0005429169), EUR 1,010,000,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005429201), EUR 210,000,000: not rated

Class J (ISIN IT0005429219), EUR 20,000,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio with a gross book value of around EUR 6,033m, originated by Intesa Sanpaolo S.p.A. The portfolio will be serviced by Intrum Italy S.p.A. as special servicer.

The securitised portfolio consists of a granular pool of 74,312 non-performing loans extended to companies (89.4%) and individuals (10.6%). It comprises secured exposures guaranteed by a first-lien mortgage (41.2%), unsecured loans for a share of 55.1% and junior secured loans for a share of 3.7%. Secured loans are backed by residential properties (38.0% of property values), industrial assets (26.3%), commercial assets (16.7%), land and agricultural (14.5%), while the remaining collateral (4.5%) is composed of ships and other property types. Properties are fairly distributed across Italy’s northern, central and southern regions.

The notes have been structured in accordance with requirements of the Italian GACS scheme, updated in 2019. The transaction’s structure comprises three tranches of sequential, principal-amortising notes, an amortising liquidity reserve equal to 4.0% of the outstanding class A, and an interest rate cap agreement to hedge interest rate risk on class A notes.

The transaction is exposed to the following key counterparties: i) Intesa Sanpaolo as seller, account bank, and swap counterparty; ii) Intrum Italy S.p.A. as special servicer; iii) Banca Finaziaria Internationale S.p.A. as master servicer, noteholders’ representative, calculation agent, corporate servicer and monitoring agent; and iv) BNP Paribas Securities Services, Milan Branch, as paying agent and agent bank.

Rating rationale

The rating is primarily driven by the expected recovery amounts and by the timing of collections from the NPL portfolio. Recovery amount and timing assumptions are based on the portfolio’s characteristics, as well as Scope’s economic outlook for Italy and assessment of the special servicer’s capabilities. The rating considers the structural protection provided to the notes, the absence of equity leakage provisions, the liquidity protection provided by the cash reserve, and the interest rate hedging agreement. The rating also addresses exposures to the key transaction counterparties. In order to assess the issuer’s exposure to credit counterparty risks Scope considered counterparty substitution provisions in the transaction, counterparty ratings from Scope, when available, or public ratings.

Key rating drivers

Structural protection (positive). The class A noteholders are mainly protected by the subordination of class B principal and junior notes liabilities. Class B interest payments will be fully deferred if the special servicer fails to meet at least 90% of business plan targets regarding cumulative collections or profits on closed positions. In addition, up to 30% of the special servicer’s performance fees will be deferred subject to certain underperformance events. The size of the class A notes relative to the portfolio’s gross book value (16.7%) is average compared with that of Scope-rated peer transactions with similar shares of unsecured exposures. Liquidity protection provided by the cash reserve, equal to 4.0% of the class A, is around the transaction peer average.¹

Interest rate hedge (positive). Interest rate risk is mainly mitigated by the subordination of the class B Euribor component and through an interest rate swap agreement that effectively caps the base rate payable on the class A notes under the most plausible scenarios, in accordance with a cap schedule ranging from 0% at the issue date to 0.8% at April 2033. The swap notional schedule is generally aligned with the amortisation profile on the class A notes as expected by Scope.^{1, 5}

Portfolio granularity (positive). Borrower concentration is below the average of Scope-rated transaction peers. The top 10 and top 100 borrowers represent 5.2% and 19.6% of the portfolio’s gross book value, respectively. More granular portfolios reduce noteholders’ exposure to idiosyncratic risks.^2,3

Exposure to unsecured loans (negative). The portfolio has a relatively large share of unsecured NPLs (58.8%, including junior secured loans). In addition, these loans have been classified as defaulted for a relatively long time (5.9 years) and are granted mainly to corporate debtors. These attributes typically lead to below-average recoveries.^2,4

Mortgage NPL collateral quality (negative). The shares of non-residential properties (62%) and non-drive-by valuations (69%) are high relative to levels among Scope-rated transaction peers. Scope has addressed the related risks though transaction-specific haircuts of property and valuation types.^2,3

Non-residential properties include large shares of industrial and commercial properties, whose values are typically more uncertain or volatile. Appraisal types include desktop valuations (23.4%), which are generally lower quality than drive-by valuations. The portfolio also comprises large shares of automated and CTU valuations, which are generally lower quality than desktop valuations.^2,4

Legal stage (negative). Scope has assumed that about 65% of the secured exposures are at the initial stage of the legal recovery process, which entails longer recovery timing expectations than those in advanced stages. The analysis of the class A notes factors in a stressed weighted average life for secured portfolio collections of 7.2 years. Recovery timing expectations are also driven by the composition of recovery procedures. About 50% of the secured portfolio’s gross book value corresponds to borrowers currently under bankruptcy, which is average among transaction peers. Bankruptcy proceedings typically result in lower recoveries and take longer to be resolved than non-bankruptcy proceedings.^2,3,5

Rating-change drivers

Rapid economic growth following the pandemic crisis (upside). A scenario of rapid economic recovery would improve liquidity and affordability conditions and prevent a sharp deterioration of collateral values, enhancing servicer performance on collection volumes.

Servicer outperformance on recovery timing (upside). The pandemic led to the temporary suspension of Italian court activity. If courts proceed faster than expected on their case backlogs, an outperformance on recovery timing could occur.

Longer-lasting pandemic crisis (downside). Recovery rates are generally highly dependent on the macroeconomic climate. Scope’s baseline scenario for Italian GDP foresees a 9.6% contraction in 2020 (with downside risks on this estimate) and a 5.6% rebound in 2021. If the current crisis were to last beyond Scope’s baseline scenario, liquidity conditions would be more likely to deteriorate, thereby reducing servicer performance on collection volumes.

Quantitative analysis and assumptions

Scope calculated each tranche’s expected loss and weighted average life by analysing cash flows, reflecting the transaction’s structural features. As the first step, Scope analysed the assets to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans. Scope’s analysis for recoveries used different approaches for secured and unsecured exposures.

For senior secured exposures, Scope’s expected collections are mainly based on the most recent property appraisal values minus a series of haircuts that depend on the collateral type, appraisal type and Scope’s forward-looking regional property price expectations. Scope derived recovery timing assumptions considering line-by-line asset information on the type of legal proceeding, the court issuing the proceeding, and the stage of the proceeding as of the cut-off date.

For unsecured and junior secured exposures, Scope used historical line-by-line, market-wide recovery data on defaulted loans between 2000 and 2019, as well as historical data provided by the servicer. Scope calibrated its assumptions considering that unsecured borrowers were classified as defaulted for a weighted average of 5.9 years as of the cut-off date.

For the class A notes analysis, Scope assumed a gross recovery rate of 22.4% over a weighted average life of 6.6 years. By portfolio segment, Scope assumed a gross recovery rate of 45.4% for the senior secured portfolio and 6.3% for the unsecured and junior secured portfolio. Scope applied an average combined security value haircut to indexed property appraisals of 49.2%, which consists of i) an average fire-sale discount (including property type and valuation type haircuts) of 40.8%, reflecting liquidity or marketability risks; and ii) average forward-looking property price decline stresses of 14.2%, reflecting Scope’s view of downside market volatility risk. The calculation of the security value haircut rate excluded collateral positions sold between the cut-off date and the issue date. Scope considered the existing servicer fees structure and assumed legal expenses to be around 10% of lifetime gross collections. Single asset exposure risks were captured by applying a recovery rate haircut of 10% to the 10 largest borrowers.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations in the main input parameters: the portfolio recovery-rate and the portfolio 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 change compared to the assigned credit rating in the event of:

• a decrease in secured and unsecured recovery rates by 10%, one notch.
• an increase in the recovery lag by one year, zero notches.

Rating driver references
1. Transaction documents
2. Loan-by-loan data tape of the securitised pool
3. Peer transactions’ data tapes
4. Servicer historical data 
5. Scope’s Cash Flow Model

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 1.1 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 are the Non-Performing Loan ABS Rating Methodology (9 September 2020) and the Methodology for Counterparty Risk in Structured Finance (8 July 2020), available on https://www.scoperatings.com/#!methodology/list.
The model used for this rating is 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 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 received a third-party asset pool audit. The external asset pool audit was considered when preparing the rating and it has no impact on the credit rating.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Antonio Casado, Executive Director.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The rating was first released by Scope on 18 December 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
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