Rating actions

The transaction comprises the following instruments:

Class A (ISIN IT0005357360), EUR 283.0m outstanding: downgraded to BB+_SF from BBB_SF

Class B (ISIN IT0005357386), EUR 70.0m outstanding: not rated

Class J (ISIN IT0005357394), EUR 95.0m outstanding: not rated

Scope’s review considered investor and payment reports through the June 2020 payment period and servicer reports through the 31 October 2020 cut-off date.

Transaction overview

Belvedere 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 a gross book value (GBV) of EUR 2,545.0m at closing. The portfolio is serviced by Bayview Italia S.r.l. (BVI) and Prelios Credit Servicing S.p.A. (Prelios). The transaction closed on 21 December 2018.

After three payment dates cumulative gross collections (EUR 70.7m) are 47.9% of the original business plan, while cumulative net collections (EUR 64.3m) are 45.8% of the original business plan. This is the furthest behind plan of the 25+ Italian NPL transactions monitored by Scope. The sources of total gross collections since closing are split between judicial proceeds (80.9%), discounted pay-off (‘DPO’) proceeds (13.4%), note sales (4.0%), and other sources of collections (1.7%). Closed borrowers (i.e. borrowers for which the recovery process has fully concluded) represent 9.7% of gross collections. The reported present value cumulative profitability ratios are 104.8% and 245.8% for BVI and Prelios, respectively.

12.5% of the Class A notional balance has amortised since closing, leaving the Class A notes’ outstanding balance relative to outstanding portfolio GBV at 11.6% (12.6% at closing).

Rating rationale

The rating action is driven by a combination of Scope’s updated modelling assumptions due to the negative macro-economic implications of Covid-19, as well as observed transaction performance since closing. Key updates include expected property price declines of about 5% in the short term. Scope expects lifetime collections to be 13.1% lower compared to the gross expected collections forecasted at closing.

Transaction performance has been below Scope’s expectations since closing. Realised cumulative gross collections through three payment dates are 80.2% of Scope’s original BBB scenario expectations, while the recovery rate on closed positions stands at 23.4% (GBV) compared to our BBB expectation of 23.8%.

No servicer underperformance events have been breached, given the cumulative collection ratio and the present value cumulative profitability ratio have not fallen below 90% for the respective servicers. Class A interest and principal repayments are fully senior to Class B interest and principal payments, which is not a typical feature in Italian NPL transactions.

Relevant transaction counterparties are: i) Bayview Italia S.r.l. and Prelios Credit Servicing S.p.A., the special servicers (Prelios is also master servicer); ii) Securitisation Services S.p.A., the back-up master servicer and calculation agent; iii) BNP Paribas Securities Services, Milan Branch, account bank, agent bank, cash manager and paying agent; iv) Bayview Global Opportunities Fund S.C.S. SICAV-RAIF, the indemnity provider; and v) JP Morgan AG and BNP Paribas as interest rate cap provider. All counterparties continue to support the ratings.

Key rating drivers

CREDIT POSITIVE (+)

Class A turbo amortisation. The principal on Class A is paid before interest on the subordinated classes¹. This feature has been active since closing and is not dependent on cumulative collections and/or profitability triggers, which is more often the case in peer transactions.

CREDIT NEGATIVE (-)

Italian economy. The Italian economy faces a deep economic recession fuelled by the Covid-19 pandemic². Despite governmental support measures, increased collateral liquidity risk and weakened borrower liquidity positions negatively affect recovery prospects.

Collection pace. Gross collections through three payment dates are 19.8% below Scope’s expectation at closing, and 52.1% below the original business plan^1,3. This ratio is effectively unchanged when considering the five months of reported collections since the last payment date.

Weak liquidity: The cash reserve covers less than two payment dates worth of senior fees and costs, which is on the lower end of Italian NPLs rated by Scope³.

Rating-change drivers

POSITIVE (+)

Increased out of court settlements and/or quicker judicial resolutions could positively 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.

Continued collection delays and/or an increase in recovery costs may negatively impact 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.

Scope has updated its modelling assumptions to reflect the current performance of the transaction along with our forward-looking view. The Class A rating scenario considered a lifetime gross recovery rate of 19.6% over the portfolio’s weighted average life of 6.1 years.

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 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 a:

• 10% haircut to recoveries, four notch decrease;
• one-year recovery lag increase, two notch decrease.

Rating driver references
1. Original transaction documentation
2. Scope’s economic research
3. Servicing, investor, payment reports

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: agents of the issuer, public domain, 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: Thomas Miller-Jones, Associate Director
Person responsible for approval of the rating: David Bergman, Managing Director
The rating was first released by Scope on 21 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
© 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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