Scope Ratings has today assigned final ratings to the notes issued by POP NPLs 2020 S.r.l., a cash securitisation of a EUR 920m portfolio of Italian non-performing leases originated by 15* Italian banks, listed in the appendix.

The rating actions are as follows:

Class A (ISIN: IT0005431900), EUR 241,500,000: assigned a final rating of BBB_SF

Class B (ISIN: IT0005431918), EUR 25,000,000: assigned a final rating of CC_SF

Class J (ISIN: IT0005431926), EUR 10,000,000: not rated

 Transaction overview

The transaction is a static cash securitisation of an Italian non-performing loans portfolio with a gross book value of EUR 920m. The portfolio was originated by 15* Italian banks and will be serviced by Credito Fondiario S.p.A. and Fire S.p.A. as special servicers and Credito Fondiario S.p.A. as the master servicer. The issuer acquired the portfolio at the transfer date of 22 December 2020.

Most of the pool is composed of secured loans (55.9%** of gross book value). Borrowers are mainly corporates (75% of gross book value). The portfolio is primarily backed by a mix of residential and commercial or industrial real estate assets (46.6% and 32.2% of property value underlying first-lien claims, respectively), while the remainder is mainly land or residual asset types/assets under development (9.5% and 11.6% of property value underlying first-lien claims, respectively). Properties are concentrated in northern Italy (62.2% of property value underlying first-lien claims). Asset information reflects Scope’s pool adjustments on collections and sold properties since the cut-off date of 31 December 2019.

The structure comprises three classes of notes with fully sequential principal amortisation: senior class A, mezzanine class B, and junior class J. The class A notes will pay a floating rate indexed to six-month Euribor plus a margin of 0.30%. Class B notes will pay a floating rate indexed to six-month Euribor plus a margin of 12%. The class J principal and interest are subordinated to the principal repayment of the senior and mezzanine notes.

The notes have been structured considering the requirements of the 2019 GACS Scheme.

Rating rationale

The rating is primarily driven by the expected recovery amounts and timing of collections from the non-performing loans portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics as well as Scope’s economic outlook for Italy and its assessment of the special servicer’s capabilities. The rating is supported by the structural protection provided to the notes, the absence of equity leakage provisions, the liquidity protection, and the interest rate hedging agreement.

The rating also addresses the issuer’s exposure to key counterparties, with the assessment based on counterparty substitution provisions in the transaction and, when available, Scope’s ratings or other public ratings on the counterparties. 

Key rating drivers

Valuation type (positive). A large share of property appraisals are drive-by valuations (46% of property value underlying first-lien claims¹), which are usually of higher quality compared to desktop, CTU or other valuation types.

Collateral concentration in Northern Italy (positive). Most collateral assets are concentrated in Italy’s northern regions (62.2% of property value underlying first-lien claims¹), where court procedures are relatively faster than in other regions.

Significant share of low loan-to-value positions (positive). A significant share of loans is below 100% loan-to-value (45.7% of senior secured gross book value¹), this leads to higher security coverage as compared to portfolios with a smaller share of low loan-to-value loans.

Strong interest rate protection (positive). The structure features an interest rate cap, together with a cap on the Class A base rate embedded in the terms and conditions of the notes, ensuring that the maximum payable base rate on Class A notes is capped at 0%³. The cap notional is above Scope’s Class A amortization profile under the base case scenario.

Property type (negative). A large portion of the portfolio is backed by non-residential collateral (53.3% of property value underlying first-lien claims¹), which may lead to more volatile realised recovery amounts.

Significant portion of legal proceedings in initial stages (negative). Scope expects a weighted average recovery timing of 6.6 years, which is long compared to peer transactions rated by Scope. Around 58% of senior secured loans (by gross book value)¹ are in the initial legal phase or yet to be initiated. This results in a longer expected time for collections than for loans in more advanced phases.

Rating-change drivers 

Servicer outperformance on recovery timing (upside). The pandemic led to a slowdown of the courts’ activity. Faster than expected courts workout of legal proceedings backlogs could lead to an outperformance on recovery timing. This could positively impact the rating.

Long lasting pandemic crisis (downside). Recovery rates are generally highly dependent on the macroeconomic climate. Scope baseline scenario² foresees a 9.6%*** gross domestic product contraction in 2020 before rebounding with growth of 5.6%*** in 2021. If current crisis will last beyond Scope baseline scenario, liquidity conditions could deteriorate, reducing servicer performance on collection volumes. This could negatively impact the rating.

Quantitative analysis and key assumptions

Scope analysed cash flows, reflecting the transaction’s structural features, to calculate each tranche’s expected loss and weighted average life. 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 performed a specific analysis for recoveries, using different approaches for secured and unsecured exposures. For secured loans, collections were mainly based on the most recent property appraisal values, which were stressed for the appraisal type, and liquidity and market value risks. Recovery timing assumptions were derived using line-by-line asset information detailing the type of legal proceedings, the court in which the proceedings are ongoing, and the stage of the proceeding as of the cut-off date. Scope also considered historical data provided by the servicer. For unsecured loans, Scope used historical line-by-line and market-wide recovery data on defaulted loans between 2000 and 2019 and considered the special servicer’s capabilities when calibrating lifetime recoveries. Scope notes that unsecured and junior secured loans were classified as defaulted for a weighted average of 3.8 years as of the cut-off date. The analysis also accounted for the current macroeconomic scenario and took a forward-looking view on macroeconomic developments.

For analysis of the class A notes, Scope assumed a gross recovery rate of 34.4% with a weighted average life of 6.6 years. By portfolio segment, Scope assumed a gross recovery rate of 51.4%^a for secured loans and 12.9%^b for unsecured and junior secured loans. Scope has applied an average combined security value haircut of 51.2%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 43.2% to security values, reflecting liquidity or marketability risks; and ii) property price decline stresses (13.4% on average), reflecting Scope’s view of downside market volatility risk. Scope’s calculation of the weighted average security value haircut excludes any collateral sold between the cut-off date and the issue date.

Scope’s analysis considered the servicer fee structure and legal expenses at around 9% of lifetime gross collections. Scope captured single asset exposure risks by applying a recovery rate haircut of 10% to the 10 largest borrowers in analysis of the class A notes. 

Sensitivity analysis

Scope tested the resilience of the rating 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 the class A change compared to the assigned credit rating in the event of:

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

The following shows how the results for the class B change compared to the assigned credit rating in the event of:

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

Rating driver references
1. Loan-by-loan data tape of the securitised pool (confidential)
2. Italy’s debt sustainability remains a challenge, despite low interest costs and pro-growth agenda
3. Transaction documents (confidential)

Appendix 1: Originators
Banca Del Sud
Cassa di Ravenna
Banca di Imola****
Banca di Piacenza
Banca Popolare di Fondi
Banca Popolare di Frusinate
Banca Popolare Del Cassinate
Civibank
Cassa di Risparmio di Asti
Biver Banca
Banca di Credito Popolare
Banca Popolare di Puglia E Basilicata
Solution Bank
Banca Agricola Popolare di Ragusa
Banca Popolare di Sondrio

Editor’s notes:
*This was amended on 5 January 2021. In the original publication the number of originators was 14.
**This number was amended to 55.9% from 55.8% on 5 January 2021 to rectify a rounding error.
***The GDP estimate was amended to reflect the latest GDP growth estimate; baseline scenario was changed to 9.6% from 9% and GDP growth was changed from 5.6% to 6.1% on 5 January 2021.
****Banca di Imola was added on 5 January 2021 to correct for its exclusion from the list of originators in the original publication.
a) This number was amended from 51.9% to 51.4% on 20 January 2021 to rectify a reporting error. The amendments have no impact on our analysis.
b) This number was amended from 12.2% to 12.9% on 20 January 2021 to rectify a reporting error. The amendments have no impact on our analysis.

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), are 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: Chirag Shekhar, Analyst.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The rating was first released by Scope on 23 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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