The rating actions are as follows:

Class A (ISIN IT0005446528), EUR 135,000,000: rated BBB_SF

Class B1 (ISIN IT0005446536), EUR 11,000,000: not rated

Class B2 (ISIN IT0005446551), EUR 12,400,000: not rated

Class J (ISIN IT0005446569), EUR 6,280,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio with a gross book value of around EUR 865m. The portfolio was sold by Credito Fondiario S.p.A. and will be serviced by Credito Fondiario S.p.A. .

The securitised pool is mainly composed of senior secured loans (81% of the portfolio’s gross-book-value), while unsecured and junior secured loans are in a smaller share (13.2% and 5.8%, respectively). Loans were granted mainly to corporate debtors (72.7% of the portfolio’s gross-book-value). Properties are mainly concentrated in the north of Italy (54.6%) and are residential assets (59.1%), commercial real estate assets (16.9%), industrial properties (8.0%), land (10.8%) and other type of assets (5.2%). The issuer acquired the portfolio at the transfer date of 11 December 2020 and is entitled to all portfolio collections received since the 01 May 2021.

The transaction structure comprises four classes of notes: senior class A, mezzanine classes B1 and B2 and junior class J. Class A will pay a floating rate indexed to six-month Euribor, plus a margin of 2.5%. Classes B1 and B2 will pay a floating rate indexed to six-month Euribor, plus a margin of 3.5%, and 8.0%, respectively. Interests of classes B1 and B2 will be paid pari-passu and pro-rata, while their principal will be paid fully sequentially. Class J will pay a variable return. Interest rate risk on class A notes is hedged with an interest rate cap. The transaction envisages the set-up of a ReoCo (Real Estate Owned Company) structure, operative at closing.

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.

The pool audit reported a higher level of errors in comparison with other peer transactions. This was mitigated by (i) the fact that the servicer has committed to undertake a check on the portfolio against the reps and warranties and report then any discrepancies every six months (ii) the representation on the portfolio datatape information being true, accurate, complete and up to date.

Key rating drivers

Credito Fondiario is already servicing the portfolio (positive). Credito Fondiario has acquired 77% of the portfolio between 2016 and 2017. A 15% share was acquired in the biennium 2014-2015, while the remainder 8% was acquired up to 2020. Credito Fondiario has therefore been managing the portfolio since several years and has already performed the portfolio take-over activities, including the set-up of servicing strategies.²

High share of recent valuations (positive). 79% of the properties were valued from 2019 onwards. ¹

Residential properties (positive). The share of residential properties is above average considering peer transactions rated by Scope. Residential properties are typically more liquid than non-residential ones. ¹

Portfolio concentrated in the north of Italy (positive). A material share of the portfolio is concentrated in the north of Italy (55% of property value), which benefits from the country’s most dynamic economic conditions and, in general, the most efficient tribunals. ¹

Below-average collateralization (negative). A significant share of the portfolio (around 76% 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 20% and 55% of total gross book value, which is above the average concentration of Italian NPL transactions rated by Scope. ¹

High seasoning (negative). The weighted average time since default is around 7.7 years for the unsecured exposures and around 7.1 years for the junior secured portfolio. This is above the average seasoning of peer NPL transactions rated by Scope.¹

Significant portion of legal proceedings in initial stages (negative). Around 64% 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

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 7.5 years as of the cut-off date. Our analysis is performed at the loan-level, considering all information provided to us in the context of the transaction as well as publicly available information. 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 22.6% over a weighted average life of 7.0 years. By segment, Scope assumed a gross recovery rate of 27.0% for the senior secured portfolio and 3.9% for the unsecured and junior secured portfolio. Scope’s expected collections exclude collections received from the portfolio cut-off date (1 August 2020) to 30 April 2021, given the issuer will not be entitled to these collections.

Scope has applied an average combined security value haircut of 56.2%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 49.0% 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 an additional recovery rate haircut of 10.0% to the 10 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, minus one notch.

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 Rating are the Non-Performing Loan ABS Rating Methodology (9 September 2020), the General Structured Finance Rating Methodology (14 December 2020) and the Methodology for Counterparty Risk in Structured Finance (8 July 2020), available on https://www.scoperatings.com/#!methodology/list.
The model used for this Credit Rating 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 Rating: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties, 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 Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating is based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst Rossella Ghidoni, Director.
Person responsible for approval of the Credit Rating: Olivier Toutain, Executive Director.
The Credit Rating was first released by Scope Ratings on 25 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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