The rating actions are as follows:

Class A (ISIN IT0005449902), EUR 342,000,000: rated BBB_SF

Class B (ISIN IT0005449910), EUR 40,000,000: not rated

Class J (ISIN IT0005449928), EUR 12,000,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio with a gross book value of around EUR 1,510m. The portfolio was originated by Banco BPM S.p.A. and will be serviced by Credito Fondiario Liberty S.p.A. and Credito Fondiario S.p.A., as special and master servicer.

The securitised pool is composed of comparable shares of senior secured and unsecured loans (44.3% and 49.7%, respectively, of the portfolio’s gross-book-value), remaining exposures are junior secured (6.0%). Loans were granted mainly to corporate debtors (85.4%). Properties are mainly concentrated in the north of Italy (70.5%) and are residential assets (42.6%), commercial real estate assets (27.8%), industrial properties (14.1%), land (8%) and other type of assets (7.5%). The issuer acquired the portfolio at the transfer date of 3 June 2021 and is entitled to all portfolio collections received since the portfolio cut-off date of 31 December 2020.

The transaction structure comprises three classes of notes with fully sequential principal amortisation: senior class A, mezzanine class B and junior class J. Class A will pay a floating rate indexed to six-month Euribor, plus a margin of 0.5%, while class B will pay a floating rate indexed to six-month Euribor, plus a margin of 8%. Class J will pay a margin of 10.0% plus a variable return and a floating rate indexed to six-month Euribor. Interest rate risk on class A notes is hedged with an interest rate cap spread. The transaction envisages the set-up of a ReoCo (Real Estate Owned Company) structure, operative after closing, upon signing of a credit facility agreement to fund the ReoCo cash reserve and the costs related to its activity.

Rating rationale

The ratings are primarily driven by the expected recovery amounts and timing of collections from the NPL portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics as well as Scope’s economic outlook for Italy and its assessment of the special servicer’s capabilities. The ratings are supported by the structural protection provided to the notes, the absence of equity leakage provisions, the liquidity protection, and the interest rate hedging agreement.

The ratings also address the issuer’s exposure to key counterparties. Scope considered counterparty substitution provisions in the transaction and, when available, Scope’s ratings or other public ratings on the counterparties. Scope considered that the potential entry into force of the ReoCo would have a neutral impact on the rating.

Key rating drivers

Credito Fondiario is already servicing the portfolio (positive). Credito Fondiario is already in charge of managing the portfolio, through its servicing platform Liberty. Part of the portfolio has been serviced since 2018. The servicer has therefore performed most of the portfolio take-over activities, including the set-up of servicing strategies.²

Low seasoning (positive). The weighted average time since default is around 2 years for the unsecured and junior secured portfolio, which is moderately short in comparison with other peer NPL transactions rated by Scope.¹

Portfolio concentrated in the north of Italy (positive). The portfolio is mostly concentrated in the north of Italy (71% of property value), which benefits from the country’s most dynamic economic conditions and, in general, the most efficient tribunals.¹

High share of recent valuations (positive). 91% of the properties were valued from 2019 onwards.¹

Below-average collateralization (negative). A significant share of the portfolio (around 47% of the secured loans) has a loan-to-value higher than 100%.¹

Top borrowers’ concentration (negative). The top 10 and 100 borrowers represent around 15% and 40% of total gross book value, which is above the average concentration of Italian NPL transactions rated by Scope.¹

Significant portion of legal proceedings in initial stages (negative). Around 77% of the secured loans are in the initial legal phase or are yet to have proceedings initiated. This results in a longer expected time for collections than for loans in more advanced phases.¹

Full and drive-by valuations (negative). The portfolio has a lower-than-average share of full and drive-by valuations (27%) that are expected to be more accurate than desktop valuations (67%).¹

Rating-change drivers

Faster judicial recovery timings (upside). The pandemic led to a slowdown in court activity. An outperformance on recovery timing could occur if courts advance on proceeding backlogs faster than expected.

Rapid economic growth following the pandemic crisis (upside). A scenario of rapid economic recovery would improve liquidity and affordability conditions and prevent a sharp deterioration in collateral values. This could positively affect the ratings, enhancing transaction’s performance on collection volumes.

Long-lasting pandemic crisis (downside). Recovery rates are highly dependent on the macroeconomic environment. Scope baseline scenario^3,4 foresees GDP growth of 5.6% in 2021 after a contraction in 2020. If the current crisis lasts beyond Scope’s baseline scenario, borrowers’ affordability and real estate market liquidity could deteriorate, reducing servicer performance on collection volumes. This could 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 and derived a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.

Scope performed a specific analysis for recoveries, using different approaches for secured and unsecured exposures. For senior secured exposures, collections were mainly based on the most recent property appraisal values, which were stressed to account for, appraisal type, liquidity and market value risks. Scope derived recovery timing assumptions using line-by-line asset information, detailing the type of legal proceeding, the respective court, and the legal stage of the proceeding at the portfolio’s transfer date. For unsecured and junior secured exposures, Scope used historical line-by-line market-wide recovery data on defaulted loans between 2000 and 2019 and considered the special servicer’s capabilities when calibrating lifetime recoveries. Scope considered that unsecured and junior secured borrowers were classified as defaulted for a weighted average of 2 years as of the cut-off date. Scope also analysed historical data provided by the servicer. Scope accounted for the current macro-economic scenario, taking a forward-looking view on the macro-economic developments.

For the class A notes analysis, Scope assumed a gross recovery rate of 31.6% over a weighted average life of 6.3 years. By segment, Scope assumed a gross recovery rate of 54.1% for the senior secured portfolio and 13.8% for the unsecured and junior secured portfolio.

Scope has applied an average combined security value haircut of 50.7%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 42.6% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (14.1% on average), reflecting Scope’s view of market volatility risk.

In its analysis, Scope considered transaction’s servicer fees structure and assumed legal expenses to be around 9% of lifetime gross collections. Scope captured single asset exposure risks by applying a recovery rate haircut of 15.0% to the 20 largest borrowers in the class A analysis.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations in the main input parameters: the portfolio recovery-rate and the portfolio 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 change compared to the assigned credit ratings in the event of:

• a decrease in secured and unsecured recovery rates by 10%, minus two notches.
   
• an increase in the recovery lag by one year, zero notches.

Rating driver references
1. Loan-by-loan data tape of the securitised pool (confidential)
2. Transaction documentation (confidential)
3. Italy’s debt sustainability remains a challenge, despite low interest costs and pro-growth agenda
4. 2021 Sovereign Outlook Recovery at last, with monetary and fiscal frameworks in transition, and diverging sovereign rating implications 

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, 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 (Cash Flow Model v1.1.) 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 its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: the Rated Entity, the Rated Entities’ Related Third Parties, third parties and public domain.
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.

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 Rossella Ghidoni, Director
Person responsible for approval of the ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 22 June 2021.

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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