Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005337735), EUR 189.2m outstanding amount: downgraded to BB+_SF from BBB-_SF

Class B (ISIN IT0005337743), EUR 30.2m outstanding amount: downgraded to CCC_SF from B-_SF

Class J (ISIN IT0005337750), EUR 9.0m outstanding amount: not rated

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

Transaction overview

2Worlds S.r.l. is a static cash securitisation of secured and unsecured non-performing loans (NPLs) extended to companies and individuals in Italy. The loans were originated by Banco di Desio e della Brianza S.p.A. and Banca Popolare di Spoleto S.p.A. The issuer acquired the portfolio on the transfer date, 12 June 2018, but is entitled to all portfolio collections received since 31 December 2017 (the portfolio cut-off date). The final maturity is in January 2037.

As of 31 December 2020, aggregate gross collections were EUR 142.1m, which represents 85.3% of the original business plan expectation of EUR 166.6m. Around 71% of gross collections (EUR 101.0m) come from open debtors (i.e. debtors for which the recovery process is still ongoing). The main sources of total available gross collections are judicial proceeds (50.1%) and discounted pay-off (DPO) proceeds (29.7%) and other sources of collections (15.4%) including cash-in-court proceeds and ad-interim collections after the portfolio cut-off date. Cumulative net collections (gross collections reduced by the amount of recovery expenses) amount to EUR 133.9m, equal to 86.0% of the original business plan expectation of EUR 155.7m.

Around 34.4% 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 increased to 77.2% from 71.2% as of closing, while class B credit enhancement has increased to 73.6% from 68.2%.

Interest on class B is subordinated to the payment of class A principal if the cumulative collection ratio or the net present value (NPV) cumulative profitability ratio falls below 85% of the servicer’s business plan target. The cumulative collection ratio and NPV profitability ratio are 86% and 125% respectively. Therefore, a class B interest subordination event has not occurred. There is no unpaid interest on the class A or class B notes.

Rating rationale
The rating action is driven by the observed and expected performance of the transaction, which includes lower-than-expected secured recovery proceeds, also foreseen by the updated business plan. Scope’s updated modelling assumptions reflect the agency’s view of the transaction’s future performance.

All counterparties continue to support the ratings: i) Banco di Desio and Banca Popolare di Spoleto, the two originators, regarding representations and warranties and possible payments from borrowers, especially for the cash-in-court cases; ii) Cerved Credit Management S.p.A., the special servicer; iii) Cerved Master Services S.p.A., the master servicer; iv) Securitisation Services S.p.A., the backup servicer, calculation agent, and noteholders’ representative; vi) BNP Paribas Securities Services (Milan Branch), the account bank, cash manager, and principal paying agent; and vi) Intesa Sanpaolo S.p.A. (successor of Banca IMI S.p.A.), the interest rate cap counterparty.

Key rating drivers

Business plan review (negative): The servicer is expecting lower recoveries compared to the initial business plan: total collections from the updated business plan are around 17% lower compared to initial projections.¹

Cumulative collections (negative): Observed cumulative gross collections are 85% of the original business plan expectations through 31 December 2020, i.e.: five collection periods since closing.²

Collateral appraisal values (negative): NPL collateral appraisals are more uncertain than standard appraisals because repossessed assets are more likely to deteriorate in value. Collateral asset values which prove lower than initially expected have already contributed to reductions of expected collections in the business plan.

Italian economy (negative): The Italian economy faces a recession fuelled by the Covid-19 pandemic. Despite governmental support measures, increased collateral liquidity risk and weakened borrower liquidity positions negatively affect recovery prospects.

Liquidity protection (positive): A cash reserve equal to 4.05% of the principal amount outstanding for the class A and class B notes protects the liquidity of senior noteholders, covering senior expenses and interest on the class A notes for about four payment dates.

Interest rate cap (positive): An interest rate cap, with an increasing strike schedule which ranges from 0.3% as of closing to 1.25% from January 2025, mitigates the risk of increased liabilities on the notes in the event of a rise in Euribor levels.

Rating-change drivers

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 also analysed the assets to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.

Scope updated its modelling assumptions to reflect the current performance of the transaction. The class A rating scenario (BB+) incorporated a gross recovery rate of 37.9% over a weighted average life of 6.6 years. A baseline (B rating category) recovery rate of 42.1% was considered over a weighted average life of 6.3 years.

By portfolio segment, Scope assumed class A gross recovery rates of 57.3% and 15.5% for the secured and unsecured portfolios, respectively. Scope assumed B category gross recovery rates of 63.4% and 17.5% for the secured and unsecured segments, respectively. Scope captured idiosyncratic risk by applying rating-conditional recovery rate haircuts to the 10 largest borrowers of 0% and 6.7% for B and BB+ recovery rate scenarios, 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 the class A notes change compared to the assigned rating in the event of:

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

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

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

Rating driver references
1. Servicer business plan (Confidential)
2. Servicing reports (Confidential)

Stress testing
Stress testing was performed by applying Credit-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 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: Scope’s ‘Non-Performing Loan ABS Rating Methodology’ (9 September 2020), ‘Methodology for Counterparty Risk in Structured Finance’ (8 July 2020) and its ‘General Structured Finance Rating Methodology’ (14 December 2020). All documents are available on 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/internal analysis was considered when preparing the Credit Ratings and it had negative 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: Adam Plajner, Senior Analyst
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 25 June 2018. The Credit Ratings were last updated on 10 June 2020.

Potential conflicts
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
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.