Scope downgrades Class A and Class B notes issued by BCC NPLs 2018 S.r.l. – Italian NPL
Scope Ratings GmbH (Scope) has reviewed the performance of BCC NPLs 2018 S.r.l., a static cash securitisation of a portfolio of Italian non-performing loans originated by 23 Italian banks.
The transaction comprises the following instruments:
Class A (ISIN IT0005338717), EUR 222.1m outstanding: downgraded to B+SF from BB-SF
Class B (ISIN IT0005338741), EUR 31.4m outstanding: downgraded to CSF from CCSF
Class J (ISIN IT0005338758), EUR 10.46m outstanding: not rated
Scope’s review was based on investor and payment reports, along with servicer reporting through the December 2020 payment date.
BCC NPLs 2018 S.r.l. is a static cash securitisation of secured and unsecured non-performing loans (NPLs) that were extended to companies and individuals in Italy. The loans were originated by 21 Italian cooperative banks coordinated by Iccrea S.p.A. and two banks belonging to ICCREA Banca S.p.A. The transaction closed on 10 July 2018 and the legal maturity is in June 2038.
As of 30 November 2020, aggregate gross collections stood at EUR 105.2m, which represents 89.8% of the original business plan expectations of EUR 117.1m by the current period. Around 35% of gross collections were made from open debtors (i.e. debtors for which the recovery process is still ongoing). Main sources of gross collections are judicial proceeds (40%), note sale proceeds (38%), discounted pay-off (‘DPO’) proceeds (21%) and other unspecified type of collections (1%). Fully resolved borrowers account for around 15% of all borrowers.
Cumulative net collections (gross collections net of recovery expenses), amount to EUR 100m, which equals 91.6% of the original business plan expectations of EUR 109.1m.
At the latest reporting date, around 21% of the class A notes’ notional has amortised. However, as a significant share of the underlying pool’s original gross book value now corresponds to positions on which no further collections are expected (i.e., closed debtors), class A credit enhancement relative to the portfolio’s outstanding gross book value has decreased slightly from 73% to 71%.
Interest on class B is subordinated to payment of class A principal if either 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 servicer for the last payment date (December 2020), the net cumulative collection ratio and the NPV profitability ratio are at 91.6% and 91.7%, respectively. Therefore, a subordination event that occurred on the prior payment date has now been cured.
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.
The ratings also address exposures to the key transaction counterparties: Prelios Credit Servicing S.p.A. (Prelios) as servicer; Securitisation Services S.p.A. as back-up master servicer, corporate services provider, representative of the noteholders, and calculation agent; Zenith Service S.p.A. as monitoring agent; BNP Paribas Securities Services, Milan Branch as account bank; JP Morgan as interest rate cap provider. All counterparties continue to be supportive for the ratings.
Key rating drivers
Underperformance on closed positions (negative): As of the latest reporting date, profitability on closed borrowers stood at 86% relative to original business plan forecasts2. Relative to Scope’s base case expectations at closing, profitability on fully resolved secured positions stands at 55% per latest reporting. This is low relative to the average for Italian NPL transactions rated by Scope.
Continued notesales with low profitability (negative): Notesales have been an important recovery strategy for the servicer, accounting for 38% of gross collections so far2. However, some large positions have been sold at a significant discount to the amounts forecast in the original business plan. A continuation of this trend may lead to front-loaded but lower nominal collections and cause significant losses for mezzanine noteholders.
Property sales (negative): The special servicer has managed to sell 1192 properties since the transfer date2. The aggregated sale amount is significantly lower than the market value of corresponding properties.
Lower than expected recovery costs (positive): Recovery expenses have been significantly lower than the servicer’s expectations, as well as Scope’s modelling at closing. Thus far, cumulative recovery costs were 41% lower than original business plan forecast2. As a result, the servicer now expects lifetime recovery expenses to be 29% below the initial business plan1.
Liquidity protection (positive): The cash reserve stands at 5% of the current outstanding balance of the Class A notes2. This protects the liquidity of senior noteholders, covering senior expenses and interest on class A notes for about four payment dates.
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. The class A rating scenario incorporated a lifetime gross recovery rate of 38.4% over a weighted average life of 5.4 years. In the analysis of class B, Scope considered a recovery rate of 39.2% over a weighted average life of 5.5 years.
By portfolio segment, Scope assumed a class A gross recovery rate of 50.9% and 14.3% for the secured and unsecured portfolios, respectively. Scope assumed a class B gross recovery rate of 52% and 14.8% for the secured and unsecured segments, respectively. Scope also captures idiosyncratic risk by applying rating-conditional recovery rate haircuts to the 10 largest borrowers.
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 model rating outcome 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 model rating outcome in the event of:
10% haircut to recoveries: zero notches;
- a one-year recovery lag increase: zero notches.
Rating driver references
1. Confidential documents of issuer, servicer, arranger, and originators
2. Confidential servicer reports, investor reports and updated transaction data tape
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.
The methodologies used for these Credit Ratings (Non-Performing Loan ABS Rating Methodology, 9 September 2020; General Structured Finance Rating Methodology, 14 December 2020; Methodology for Counterparty Risk in Structured Finance, 8 July 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. The external due diligence assessment 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.
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: Chirag Shekhar, Analyst
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope on 10 July 2018. The Credit Ratings/Outlooks were last updated on 3 March 2020.
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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