Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005336992), EUR 414.6m outstanding amount: downgraded to B_SF from B+_SF

Class B (ISIN IT0005337008), EUR 66.8m outstanding amount: affirmed at CC_SF

Class J (ISIN IT0005337016), EUR 10.0m outstanding amount: not rated

Scope’s review was based on available payment information and investor and servicer reporting through January 2021.

Transaction overview

Aragorn NPL 2018 S.r.l. is a static cash securitisation of secured and unsecured non-performing loans extended to companies and individuals in Italy worth around EUR 1.6bn by gross book value (GBV). The loans were originated by Credito Valtellinese S.p.A. and Credito Siciliano S.p.A., which are subsidiaries of the Credito Valtellinese Banking Group. The transaction closed on 14 June 2018 and the legal maturity is in July 2038.

Through the 31 December 2020 collection period, aggregate gross collections were EUR 139.4m, which represents 46% of the original business plan expectations of EUR 303.2m. Total available gross collections are split between discounted pay-off (‘DPO’) proceeds (55.0%), judicial proceeds (25.4%), credit sales proceeds (16.1%) and other sources of collections (3.5%).

Around 49.6% of gross collections (EUR 69.2m) come from closed debtors (323 debtors), whose GBV represents around 11% of the transaction’s initial GBV. The net profitability on closed debtors (as reported in the servicer report) is below the servicers’ expectation, standing at 81.5%. Gross collections from closed debtors are split between DPO proceeds (64.9%), credit sale proceeds (32.3%), judicial proceeds (2.7%) and other types of collection (0.1%).

Around 18.6% of the class A notes’ notional has amortised. As a result, class A credit enhancement relative to the portfolio’s outstanding gross book value has slightly increased to 72.2% from 69.5%.

Interests on class B are subordinated to payment of class A principal if the net cumulative collection ratio falls below 90% of the servicers’ business plan target or the NPV profitability ratio falls below 90%. This ratio is curable, and once is cured, all accrued and unpaid interest are distributed senior to Class A principal payments.

According to the data provided by the master servicer for the latest interest payment date (January 2021), a class B interest subordination event has occurred as the transaction’s net cumulative collection ratio and the NPV profitability ratio are at 51.9% and 94.4%, respectively.

Rating rationale

The rating action is driven by the observed and expected performance of the transaction, as well as Scope’s updated modelling assumptions, which reflect transaction performance and current and developing macro-economic factors. Scope also compared the transaction’s performance to its own recovery assumptions, taking into account enhanced views on asset resolution timing, recovery estimates and macro-economic fundamentals, all developed through transaction-specific observations and benchmarking.

The transaction relies on two independent special servicers: Credito Fondiario S.p.A (also the master servicer) and Cerved Credit Management S.p.A., and it is also exposed to i) Citibank NA, Milan Branch as account bank, cash manager, paying agent and representative of noteholders; ii) Intesa Sanpaolo S.p.A. as interim collections account bank; iii) Securitisation Services S.p.A as monitoring agent; and iv) Société Générale as the interest rate cap provider. All counterparties continue to be supportive for the ratings.

Key rating drivers

Senior notes’ liquidity protection (positive)¹: A cash reserve protects the liquidity of senior noteholders, covering senior fees and interest on class A notes. It currently stands at EUR 21.6m (around 5.0% of class A notes’ principal amount after the January 2021 payment date).

Portfolio servicing (positive)¹: Two independent special servicers limit the transaction’s sensitivity to servicer disruption. In the event of a servicer disruption, the master servicer will assist the issuer in finding a suitable replacement.

Cumulative collections (negative)¹: Observed cumulative gross collections are 46% of the original business plan expectations through 31 December 2020, i.e.: five collection periods since closing.

Closed debtors’ profitability (negative)¹: The net profitability ratio for closed positions, at 81.5%, is underperforming the level in the initial business plan. Actual gross collections linked to closed debtors are also lower than Scope’s expectations at closing for the borrowers in question.

Servicers’ business plan review (negative)²: Special servicers are expecting lower recoveries compared to the initial business plan: total collections from the update business plan are 18% lower compared to initial projections.

Distorted cumulative collection ratio (negative)¹: The net cumulative collection ratio definition from the terms and conditions of the notes does not reflect the actual performance of the pool and wakens the effectiveness of the performance triggers, which has significant negative impact on the cash flows allocated to class A amortisation.

Italian economy (negative)³: The Italian economy is facing a deep recession fuelled by the Covid-19 pandemic and is now relying on public investment to revive longer-term growth. Despite governmental support measures, increased collateral liquidity risk and weakened borrower liquidity positions negatively affect the recovery prospects.

Rating-change drivers

Positive. A decrease in legal expenses could positively affect the rating.

Positive. Consistent servicer outperformance in terms of recovery timing and the total amount of collections could positively impact the rating.

Negative. Servicer performance which falls short of Scope’s collection amounts and timing assumptions could 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. The class A and class B rating scenario incorporated a gross recovery rate of 44.5% over a weighted average life of 8.9 years. By portfolio segment, Scope assumed a class A and class B gross recovery rate of 56.3% and 13.9% for the secured and unsecured portfolios, respectively.

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 rating 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:

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

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

• 10% haircut to recoveries, zero notches;
   
• a one-year recovery lag increase, zero notches.

Rating driver references
1. Transaction documents and reporting (Confidential)
2. Updated servicers’ business plan (Confidential)
3. Scope 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 Ratings’ 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 these Credit Ratings, (Non-Performing Loan ABS Rating Methodology, published on 9 September 2020; Methodology for Counterparty Risk in Structured Finance, published on 8 July 2020; General Structured Finance Rating Methodology, published on 14 December 2020), are available on https://www.scoperatings.com/#!methodology/list.
The model used for these Credit Ratings is (Scope Cash Flow SF EL Model Version 1.1), available in Scope Ratings’ list of models, published under https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Credit 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 factors) are incorporated into the Credit 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/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, 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 these 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 a third-party asset due diligence assessment/asset audit at closing. The external due diligence assessment/asset audit was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Leonardo Scavo, Senior Analyst
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 12 June 2018. The Credit Rating was last updated on 5 June 2020.

Potential conflicts*
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings. A member of the Board of Trustees of Scope Foundation has a significant relationship with Société Generale SA, a related third party to this transaction. The Scope Foundation is a 20% shareholder of Scope Management SE, the general manager of Scope SE & Co KGaA (“Scope Group”). Scope Foundation has no financial or economic interest in Scope SE & Co KGaA and the main function of the foundation is to preserve the European identity of the shareholder structure of Scope Group.

*Editor's note: This section was amended on 28 September 2021. On the publication date of 20 May 2021, the section originally stated: "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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