The rating actions are as follows:

Class A (ISIN IT0005432049), EUR 90,500,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005432056), EUR 15,000,000: not rated

Class J (ISIN IT0005432064), EUR 10,070,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian non-performing lease portfolio worth around EUR 335m by gross book value (GBV). The portfolio was originated by Alba Leasing S.p.A. (57% of GBV), Release S.p.A. (26% of GBV) and Banco BPM S.p.A. (17% of GBV). The pool will be serviced by Prelios Credit Servicing S.p.A. as special and master servicer.

The portfolio consists of disposable leased assets for a share of 59.2% of GBV and of non-immediately disposable leased assets (i.e., non-repossessed assets, repossessed assets not yet regularised, or assets subject to specific laws or contractual provisions) for a share of 40.8% of GBV. The issuer acquired the portfolio at the transfer date of 12 December 2020, and the disposable assets were transferred to Zeus LeaseCo S.r.l. on the same date. The originators have undertaken to transfer the non-immediately disposable assets to Zeus LeaseCo S.r.l. by 30 June 2021. The originators will return the original purchase prices (plus indemnity amounts) for those leased assets that are not yet eligible to be transferred by 30 June 2021.

The pool is composed of 87.7% of secured real estate leases (relevant assets yet to be sold), 12.3% of unsecured receivables (relevant assets already sold) and 2.8% of equipment leases. Borrowers are mainly corporates (99.4%). Secured real estate leases are mainly backed by industrial and commercial assets (50.8% and 46.0% of property values, respectively). The remaining assets are residential properties, land and residual type of assets (1.0%, 1.0% and 1.2%, respectively). Properties are concentrated in northern Italy, with 72.0% of property values. Central and southern regions account for 14.5% and 13.5%, respectively. Equipment leases are mainly backed by machinery and equipment assets (73% of total equipment assets value). 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 0.50%. Class B will pay a floating rate indexed to six-month Euribor plus a margin of 8.0%. The Euribor component of class B interest, if positive, will be subordinated to the class A principal repayment. The class J principal and interest are subordinated to the principal repayment of the senior and mezzanine notes.

The notes have been structured in accordance with the GACS requirements.

Rating rationale 

The rating is primarily driven by the expected recovery amounts and timing of collections from the non-performing lease 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

Large share of full and drive-by valuations (positive). 79.5% of leased assets valuations (by total property value) are full or drive-by valuations. These valuation types are generally more accurate than CTU or statistical valuations.¹

Recent appraisals (positive). All valuations were conducted between 2018 and 2020, meaning asset values are likely to reflect the liquidity risks and price fluctuations currently present in the real estate market.¹

A material portion of secured leases are under-collateralised (negative). By gross book value, 77.5% of portfolio’s secured leases have a loan-to-value higher than 100%, based on leased assets most recent valuations.¹

Absence of line-by-line information on servicer’s sale strategy following repossession (negative). Detailed information on the servicer’s asset sale strategy helps in calibrating timing assumptions for collections.¹

Rating-change drivers 

Servicer outperformance on repossession and regularisation timing (upside). A faster-than-expected regularisation or repossession of the non-immediately transferrable assets could accelerate the timing of open market sales, leading to faster recoveries. This could positively impact the rating.

Longer-lasting pandemic crisis (downside). Recovery rates are generally dependent on the macroeconomic environment. Our baseline scenario² foresees Italian GDP to contract by 9.6% in 2020 before rebounding with 5.6% growth in 2021. If the current crisis lasts beyond this baseline scenario, real estate market liquidity 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 class A expected loss and weighted average life. As the first step, Scope analysed the assets and derived a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted leases.

Scope performed a specific analysis for recoveries, using different approaches for secured real estate leases and unsecured exposures. For secured real estate leases, 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 proceeding, the properties’ repossession status, the court issuing the proceeding, and the stage of the proceeding as of the cut-off date. For unsecured receivables, 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 considered that unsecured receivables were classified as defaulted for a weighted average of 6.2 years as of the cut-off date. The analysis also considered the current macroeconomic scenario and Scope took a forward-looking view on macroeconomic developments.

For the class A notes analysis, Scope assumed a gross recovery rate of 43.4% over a weighted average life of 4.36 years. By portfolio segment, Scope assumed a gross recovery rate of 48.6% for secured leases and 6.1% for unsecured receivables (the unsecured recovery rate figure is inclusive of collections from residual unsecured claims after the asset’s sale and from equipment leases). Scope applied an average combined security value haircut of 37.1%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 27.4% 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 security value weighted average rate excludes any collateral sold between the cut-off date and the issue date.

Scope’s analysis considered the servicer fee structure and LeaseCo operating costs at around 20% of lifetime gross collections. Scope captured single asset exposure risks by applying a recovery rate haircut of 10% to the 10 largest borrowers for the class A analysis.

 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 one notch.
   
• an increase in the recovery lag by one year, zero notches.

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

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
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, agents of the issuer, issuer, 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 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, 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 Rossella Ghidoni, Associate Director.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The rating was first released by Scope on 28 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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