Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005316275), EUR 63.4m outstanding: downgraded to B-_SF from BB-_SF

Class B (ISIN IT0005316283), EUR 10.1m outstanding: downgraded to C_SF from CC_SF

Class J (ISIN IT0005351900), EUR 13.5m outstanding: not rated

Scope’s review was based on investor and payment reports, along with servicer reporting through the April 2021 payment date.

Transaction overview

Popolare Bari NPLs 2017 S.r.l. is a static cash securitisation of secured and unsecured NPLs, originally accounting for 56% and 44% of the EUR 319.7m gross book value (GBV) at closing. The loans were mostly extended to companies (88.9%). Prelios Credit Servicing S.p.A. is the special servicer. The loans were originated by Banca Popolare di Bari S.c.p.a and Cassa di Risparmio di Orvieto S.p.A., which both belong to the Banca Popolare di Bari banking group. The transaction closed on 5 December 2017 and the legal maturity is 30 October 2037.

Through the 31 March 2021 collection period, aggregate net collections were EUR 26.0m, which is only 49.8% of the original business plan’s net expectations of EUR 52.3m. Total available gross collections are split between discounted pay-off (‘DPO’) proceeds (39.5%), note sales proceeds (27.7%), judicial proceeds (25.7%), and other sources of collections (7.1%).

Approximately 63.5% of gross collections (EUR 17.1m) are from closed borrowers (64), which represents 4.3% of all borrowers by count and 9.4% of the portfolio’s GBV at closing. The majority of closed debtors’ gross collections are split between DPO proceeds (57.6%) and note sales (38.7%).

The class A notional balance has amortised 21.7% since closing. As a result, class A credit enhancement relative to the portfolio’s outstanding GBV has increased to 77.6% from 74.7% at closing.

Class B interest is subordinated to the payment of class A principal only if the present value cumulative profitability ratio falls below 90%. Most Italian GACS NPL transactions also include a class B interest subordination trigger on the cumulative collections ratio, which better protects senior noteholders if the pace of collections falls behind the original business plan. The latest reported present value cumulative profitability ratio is 95.8% and has remained above the trigger threshold since closing.

Class B noteholders have not missed an interest payment since the second interest payment date and have benefitted from the transaction’s class B interest subordination trigger mechanism.

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 the transaction’s performance and the current and developing macro-economic factors. Scope also compared the transaction’s performance to its own recovery assumptions, considering updated views on asset resolution timing, recovery estimates and macro-economic fundamentals, all developed through transaction-specific observations and benchmarking.

Relevant transaction counterparties are: i) Prelios Credit Servicing S.p.A., the special servicer and master servicer; ii) BNP Paribas Securities Services, Milan Branch, account bank, agent bank, cash manager and principal paying agent; and iv) JP Morgan AG as interest rate cap provider. All counterparties continue to support the ratings.

Key rating drivers

Senior notes’ liquidity protection (positive)¹: A 4% cash reserve protects the liquidity of senior noteholders, covering roughly 15 months of senior fees and interest on the class A notes as of the latest payment date.

Cumulative collections vs. Scope’s expectations (negative)¹: Observed cumulative gross collections are only 55.8% of Scope’s B rating scenario from closing.

Profitability vs. Scope’s expectations (negative)¹: Profitability on closed borrowers is only 83.2% of Scope’s original B rating scenario from closing.

Italian economy (negative)²: The Italian economy faces weak economic growth in the first half of 2021 fuelled by the Covid-19 pandemic. Despite governmental support measures, increased collateral liquidity risk and weakened borrower liquidity positions could negatively affect the recovery prospects.

Weak subordination trigger (negative)¹: Class A noteholders only benefit from class B interest subordination if the present value cumulative profitability ratio on closed borrowers falls below 90%. Lengthy delays in closing out unprofitable borrowers can prolong this risk by effectively keeping the threshold above 90%.

Rating-change drivers

Positive. Improved servicer performance in terms of recovery timing and the total amount of collections could positively impact the ratings.

Negative. Servicer performance which continues to fall short of Scope’s collection amounts and timing assumptions could further negatively impact the ratings.

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. Scope assumed a 26.7% gross recovery rate over a weighted average life of 4.4 years for the class A and class B analysis.

Sensitivity analysis

Scope tested the resilience of the ratings 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;
   
• a one-year recovery lag increase, zero notches.

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. Scope research Italy: fiscal prudence requires attention even as Draghi investment plan critical to reviving growth

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 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 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: Thomas Miller-Jones, Associate Director
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 5 December 2017. The Credit Ratings were last updated on 12 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
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