Rating action

This rating action is as follows:

• Class A, EUR 475,000,000 (ISIN: XS2409267254): rated BBB_SF
   
• Class Z, EUR 1,725,000,000 (ISIN: XS2409266876): not rated

Transaction overview

The transaction is a static cash securitisation of a Cypriot non-performing loans (NPL) and real estate owned (REO) properties portfolio with a total adjusted pool value of EUR 2.06bn (total adjusted exposure of non-performing loans and appraised value of REO properties). The portfolio was originated by Bank of Cyprus (originator) and is owned by Themis Portfolio Management Holdings Limited, a Cypriot Credit Acquiring Company, (CyCAC) which was acquired by Oxalis Holdings S.à r.l (sponsor). The portfolio will be serviced by Themis Portfolio Management Limited (Themis). According to the servicer’s business plan dated September 2021, expected lifetime collections (net of asset level costs) amount to EUR 1,078.5m.

Most of the pool is composed of senior secured loans (79% of exposure). Borrowers are mainly individuals (59% of exposure). The portfolio is primarily backed by a mix of residential real estate assets and land (57% and 25% of appraised property value, respectively), while the remainder is mainly commercial and industrial real estate. Properties are concentrated in Nicosia and Limassol (35% and 29% of appraised property value). Portfolio information reflects Scope’s pool adjustments on collections and repossessed/sold properties since the cut-off date of 30 September 2019.

The transaction is not a true sale of receivables to Hestia Financing S.à r.l (issuer) and implements a two-tier structure for the management of the portfolio. The CyCAC holds the credit rights over the loans and several pre-existing Real Estate Owned Companies (REOCOs), with security rights over the REO assets.

The issuer subscribes to senior notes issued by the CyCAC, structured to allow cash flow from the assets, less certain costs and expenses of the CyCAC, to flow into the issuer’s accounts. These are then used as available funds in the issuer level waterfall to repay the issuer’s liabilities.

The structure comprises two classes of notes: senior class A and junior class Z. The class A notes will pay a floating rate indexed to three-month Euribor plus a margin of 2.5%. To hedge against interest rate risk, the issuer shall enter an interest rate cap agreement with a cap rate of 1%. Upon the cap agreement’s expiration in October 2026, the payable rate on class A notes is capped at 3.5%. Class Z notes will pay a fixed rate of 0.5% plus variable return.

Rating rationale

The rating is primarily driven by the expected recovery amounts and timing of collections from the non-performing loans and REO assets portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics as well as Scope’s economic outlook for Cyprus and its assessment of the servicer’s capabilities. The rating is supported by the structural protection provided to the notes, the liquidity reserve available to the noteholders and the interest rate cap agreement. The rating also addresses the issuer’s exposure to key counterparties, with the assessment based on counterparty substitution provisions in the transaction and, when available, Scope’s ratings or other public ratings on the counterparties.

The transaction is mainly exposed to counterparty risk from the following counterparties: i) Bank of Cyprus (regarding asset level warranties and CyCAC and REOCOs’ Cypriot account bank); ii) Themis as servicer; iii) CBRE Loan Services Limited as noteholders’ agent; iv) Citibank Europe Plc, Luxembourg Branch as issuer and CyCAC’s Luxembourg account bank; iv) Citibank, N.A., London Branch as paying agent; v) Citibank Europe PLC as security trustee and vi) Barclays Bank PLC as cap counterparty.

Key rating drivers

Loan type (positive)¹. The portfolio is mainly composed of senior secured loans (79% of exposure).

Accelerated amortisation triggers (positive)². The structure features a cash sweep event based on a target outstanding class A notional schedule, that targets full amortisation of the class A notes within 15 quarters from closing date. A breach triggers fully sequential amortisation of class A notes. This may protect senior noteholders under stressed market conditions. However, the event is cured in any following period in which the class A outstanding notional is again below the schedule.

Out-of-court foreclosure framework (positive)³. Since 2018, the foreclosure process in Cyprus is fully out-of-court, leading to a generally improved negotiating position for creditors and shorter time to resolution.

Property location (positive)¹. More than 64% of properties (by appraised value) are in urban areas, where real estate markets are generally more liquid than rural areas.

Dated valuations (negative)¹. Almost 70% of properties (by appraised value) have been valued prior to 2018, and all appraisals were done prior to the Covid-19 pandemic outbreak. These valuations may not accurately reflect current values.

Property type (negative)¹. Almost 43% of properties (by appraised value) are land or non-residential. This is high relative to other NPL portfolios analysed by Scope. Such assets are generally less liquid relative to residential assets.
Real estate market’s susceptibility to a surge in supply (negative)4. The pre-pandemic five-year (2015-19) pan-Cypriot average of registered sales per year stood at just above 8,000. Resolution of this portfolio alone could add a supply of up to 9,000 assets to the real estate market over the next few years, potentially resulting in lower realisable value or longer time to liquidation.

Rating-change drivers

Strong post-pandemic recovery (upside)⁵. The Cypriot economy is highly dependent on travel and tourism (23% of 2018 GDP). However, the island’s GDP decreased by 5.1% in 2020, proving more resilient than peer countries with a high reliance on tourism, such as Spain (-10.8%), Italy (-8.9%) and Greece (-8%). If contact-based sectors such as leisure and tourism recover faster than expected, improving macro-economic conditions may result in more favourable resolution outcomes. This could positively impact the rating.

Lower than expected profitability (downside). Servicer’s under-performance in terms of realised collections compared to Scope’s expectations 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. As the first step, Scope analysed the assets to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans and REO properties.

Scope performed a specific analysis for recoveries, using different approaches for the secured and unsecured segments of the portfolios. Both for secured loans and REO assets, collections were mainly based on the most recent property appraisal values, which were stressed for the servicer’s appraisal methodologies and liquidity and market value risks. For secured loans, recovery timing assumptions were derived using line-by-line asset information detailing the type of legal proceedings and the stage of the proceeding as of the cut-off date. Furthermore, Scope applied a line-by-line approach to derive time-to-sell assumptions for all collateral and REO assets, considering the property type and size. Scope also considered historical data provided by the servicer. For unsecured and junior secured loans, Scope considered the servicer’s capabilities when calibrating lifetime recoveries and benchmarked this against historical data from other European jurisdictions.

For analysis of the class A notes, Scope assumed a gross recovery rate of 35.9% (relative to pool value) with a weighted average life of 5.4 years. By portfolio segment, Scope assumed a gross recovery rate of 38.8% for secured loans and 2% for unsecured and junior secured loans. Scope has applied an average combined security value haircut of 42.1%, which consists of: i) an average fire-sale discount (including valuation type haircuts) of 33.3% to security values, reflecting liquidity or marketability risks; and ii) property price decline stresses (13.2% on average), reflecting Scope’s view of downside market volatility risk. Scope has addressed dated valuations by incorporating depreciation based on time since valuation. Scope’s calculation of the weighted average security value haircut excludes any collateral sold between the cut-off date and the issue date.

Scope’s analysis considered the senior costs of the companies, servicer fee structure and legal expenses at around 25.5% of lifetime gross collections. Scope captured single asset exposure risks by applying a recovery rate haircut of 10% to the 10 largest borrowers in analysis of the class A notes.

Sensitivity analysis

Scope tested the resilience of the rating 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 the class A notes change compared to the assigned rating in the event of:

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

Rating driver references
1. Loan-level data tape of the securitised pool (confidential)
2. Transaction documents (confidential)
3. Historical recovery data from the originator (confidential)
4. Department of Lands and Surveys, Republic of Cyprus
5. June 2021 Sovereign Interim Outlook, Scope Ratings

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 this Credit Rating, General Structured Finance Rating Methodology (14 December 2020), Non-Performing Loan ABS Rating Methodology (6 August 2021) and Counterparty Risk in Structured Finance (13 July 2021), are available on https://www.scoperatings.com/#!methodology/list.
The model used for this Credit Rating (Scope Cash Flow SF/EL Model Version 1.1) is 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, Rated Entities’ Related Third Parties and 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 the Credit Rating 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 audit. The external asset audit 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 are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The 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: Chirag Shekhar, Analyst
Person responsible for approval of the Credit Rating: Benoit Vasseur, Executive Director.
The preliminary Credit Ratings was first released by Scope Ratings on 5 November 2021. The final Credit Ratings was first released by Scope Ratings on 13 December 2021.

Potential conflicts¹
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. Scope Ratings provided the following Ancillary Service(s) to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Credit Estimate.

1. Editor's note: This section was amended on 27 December 2022. On the publication date of 13 December 2021, this section originally stated: "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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