Rating actions

The transaction comprises the following instruments:

Class A (ISIN IT0005360158), EUR 1,121.7m outstanding: downgraded to BBB-_SF from BBB_SF

Class B (ISIN IT0005360174), EUR 221.5m outstanding: not rated

Class J (ISIN IT0005360182), EUR 248.8m outstanding: not rated

Scope’s review considered available investor and payment reports through the July 2020 payment date along with available servicer reports through the 31 December 2020 cut-off date.

Transaction overview

Leviticus SPV 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 7,385m at closing. The portfolio is serviced by Credito Fondiario S.r.l. (Credito Fondiario). The transaction closed on 6 February 2019.

After three payment dates, reported cumulative gross collections (EUR 443.8m) are 83.6% of the original business plan’s expectations, while reported net cumulative collections (EUR 435.5m) are 85.7% of the original business plan. The sources of total gross collections since closing are split between other actual proceeds (35.4%), judicial proceeds (34.0%), discounted pay-off (‘DPO’) proceeds (26.5%) and note sales (4.1%). Closed borrowers (i.e., borrowers for which the recovery process has fully concluded) represent 63.3% of gross collections. The reported net present value cumulative profitability ratio is 101.1%.

22.1% of the Class A notional balance has amortised since closing, leaving the Class A notes’ outstanding balance relative to outstanding portfolio GBV at 16.8% (19.5% 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% and increased fire-sale discounts of 5% in the short term. Scope expects lifetime collections to be 8.2% lower compared to the gross expected collections forecasted in the Class A analysis at closing.

Transaction performance is mixed compared Scope’s expectations since closing. Realised cumulative gross collections through three payment dates are 137.9% of Scope’s original BBB scenario expectations, while the recovery rate on closed positions stands at 31.5% (of GBV) compared to our BBB expectation of 34.9% on the same positions.

No Class B interest subordination event or servicer underperformance event has been breached, given the cumulative collection ratio and the net present value cumulative profitability ratio have not fallen below 70.0% since closing. The trigger threshold is the lowest among any Italian NPL transactions with a GACS guarantee rated by Scope; however, all unpaid and due Class B interest is permanently subordinated to Class A principal if the trigger is ever breached.

Relevant transaction counterparties are: i) Credito Fondiario S.p.A. as servicer, the corporate services provider, the calculation agent, the paying agent and the cash manager; ii) Zenith Service S.p.A., as the back-up servicer and monitoring agent; iii) Intesa Sanpaolo as account bank, agent bank, cash manager and paying agent: and iv) Crèdit Agricole Corporate and Investment Bank S.A. and Banco Santander S.A. as cap counterparties. All counterparties continue to support the ratings.

Key rating drivers

CREDIT POSITIVE (+)

Increased credit enhancement¹. The Class A notional balance as a share of the outstanding portfolio GBV has decreased to 16.8% from 19.5% at closing.

Low recovery expenses¹. Recovery expenses are 1.9% of gross collections through the July 2020 payment date. Excluding ad interim collections, the ratio is 2.9%. This is on the lower end of Italian NPL transactions rated by Scope with at least three semesters of collections since closing.

CREDIT NEGATIVE (-)

Italian economy². The Italian economy is in the midst of a deep economic recession fuelled by the Covid-19 pandemic. Despite government support measures, increased collateral liquidity risk and weakened borrowers negatively affect recovery prospects.

Recovery rate on secured positions¹. A 50.0% recovery rate (of GBV) was observed on closed borrowers holding only secured loans, which is below Scope’s expectation of 57.7% on the same closed borrowers in the Class A analysis from closing.

Rating-change drivers

POSITIVE (+)

Increased recoveries on secured positions, supported by the now active ReoCo structure, 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.

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 28.7% with a weighted average life of 7.6 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, three notch decrease;
   
• one-year recovery lag increase, one notch decrease.

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

Stress testing
Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope Ratings 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 credit rating (Non-Performing Loan ABS Rating Methodology, published on 9 September 2020 and the Methodology for Counterparty Risk in Structured Finance, published on 8 July 2020) are available at https://www.scoperatings.com/#!methodology/list.
The model used for this rating (Scope Cash Flow SF/EL Model Version 1.1) is available in Scope Ratings’ 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 Ratings’ 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 entities’ agents, third parties and Scope Ratings internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the rated entity or instrument to be satisfactory. The information and data supporting Scope Ratings’ credit ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received at closing a third-party asset audit. The external asset audit was considered when preparing the credit rating and it has no impact on the credit rating.
Prior to the issuance of the credit rating action, the rated entity was given the opportunity to review the credit rating and the principal grounds on which the credit rating is based. Following that review, the credit 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. The credit rating is UK endorsed.
Lead analyst: Thomas Miller-Jones, Associate Director
Person responsible for approval of the credit rating: David Bergman, Managing Director
The final rating was first released by Scope Ratings on 6 February 2019.

Potential conflicts
Please see www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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