The rating actions are as follows:

Class A (ISIN IT0005432445), EUR 85,400,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005432452), EUR 10,000,000: not rated

Class J (ISIN IT0005432460), EUR 1,000,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio worth around EUR 322m by gross-book value (’GBV’). The portfolio was originated by BPER Banca S.p.A and Banco di Sardegna S.p.A. and will be serviced by Fire S.p.A.

The pool is composed of secured loans (48.7% of GBV, of which 44.4% senior secured and 4.3% junior secured) as well as unsecured loans (51.3% of GBV). Borrower type is equally distributed between individuals (51.1%) and corporates (48.9%). Secured loans are backed by residential and non-residential properties (73.5% and 26.5% of the total first-lien property value, respectively) that are rather concentrated in the south of Italy (57.8%) followed by northern (32.0%), and central (10.2%) regions. The issuer acquired the portfolio at the transfer date of 18 December 2020, and it is entitled to receive all the portfolio collections received since the cut-off date of 31 July 2020. Asset information reflects aggregation by loans and Scope’s pool adjustments related to collections and sold properties since the cut-off date.

The structure comprises three classes of notes with fully sequential principal amortisation: senior class A, mezzanine class B, and junior class J. Class A will pay a floating rate indexed to six-month Euribor, plus a margin of 0.5%, whilst class B will pay a floating rate indexed to six-month Euribor, plus a margin of 12%. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes.

Rating rationale

The rating is primarily driven by the expected recovery amounts and timing of collections from the NPL portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics as well as Scope’s economic outlook for Italy and Scope’s 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 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

Secured portfolio mostly backed by residential properties (positive). Compared to peer transactions rated by Scope, 73.5% of the secured loans are backed by residential assets, which tend to be more liquid than non-residential properties.¹

Above-average collateralisation (positive). A significant share of the GBV (58.6% of the secured loans) presents a loan-to-value lower than 75%. This increases the support provided by real estate collateral to secured loans.¹

Borrowers’ granularity (positive). The pool is highly granular, with the top 10 and top 100 borrowers representing, respectively, 1.5% and 11% of total GBV, which is lower compared to other Italian NPL transactions rated by Scope.¹

Interest rate risk hedged (positive). Interest rate risk on the class A notes is mitigated through a cap spread hedging structure, with an increasing upper bound rate applied to class A base rate, ranging from 0.2% to 1.4%, and a fixed lower bound rate at 0%. In addition, a cap is embedded in the class A Euribor component, aligned with the upper bound rate of the cap spread. The cap spread notional schedule is aligned with our expected amortisation profile of class A notes.²

High share of statistical and AVM valuations (negative). Most of the portfolio’s collateral appraisals are either statistical or were conducted with an automated valuation model (‘AVM’) by external appraisers (61.2%), which are generally less accurate than desktop or drive-by valuations.¹

Significant portion of legal proceedings in initial stages (negative). Around 76.3% of the secured loans are in the initial legal phase or are yet to have proceedings initiated. This figure reduces to 64.5% if we excluded secured loans under an out-of-court procedure. This results in a longer expected time for collections than for loans in more advanced phases.¹

Seasoned unsecured and junior secured portfolio (negative). The weighted average time since default is around 4 years for the unsecured and junior secured portfolio. Most unsecured recoveries are realised in the first years after a default according to historical data.³

Rating-change drivers

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

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 scenario⁴ 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 senior secured exposures, collections were mainly based on the most recent property appraisal values, which were stressed to account for, appraisal type, liquidity and market value risks. Recovery timing assumptions were derived using line-by-line asset information detailing 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 and considered the special servicer’s capabilities when calibrating lifetime recoveries. Scope considered that unsecured and junior secured borrowers were classified as defaulted for a weighted average of 4 years as of the cut-off date. Scope also analysed historical data provided by the servicer. Scope accounted for the current macro-economic scenario, taking a forward-looking view on the macro-economic developments.

For the class A notes analysis, Scope assumed a gross recovery rate of 38.0% over a weighted average life of 6.6 years. By segment, Scope assumed a gross recovery rate of 70.4% for the senior secured portfolio and 12.1% for the unsecured and junior secured portfolio. Scope has applied an average combined security value haircut of 52.4%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 44.6% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (14.1% on average), reflecting Scope’s view of downside market volatility risk. To calculate the security value haircut rate, Scope has removed the collateral positions sold between the cut-off date and the issue date.

In its analysis, Scope considered the actual servicer fees structure and assumed legal expenses to be 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 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 rating 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%, minus two notches.
   
• an increase in the recovery lag by one year, minus zero notches.

Rating driver references
1 Loan-by-loan data tape of the securitised pool (confidential)
2 Transaction documentation (confidential)
3 Servicer’s historical data (confidential)
4 2021 Sovereign Outlook

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 issuer, agents of the 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 audit. 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, 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: Leonardo Scavo, Senior Analyst.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The rating was first released by Scope on 30 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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