The rating actions are as follows:

Class A (ISIN IT0005493330), EUR 60,000,000: rated BBB_SF

Class B (ISIN IT0005493348), EUR 10,000,000: not rated

Class J (ISIN IT0005493355), EUR 4,100,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian non-performing loan (NPL) portfolio with a gross book value (GBV) of around EUR 475m. The portfolio was sold by illimity Bank S.p.A (illimity) and will be serviced by Cerved Credit Management S.p.A. (CCM) as special servicer and by Cerved Master Services S.p.A. as master servicer. The issuer is entitled to all portfolio collections received since the portfolio cut-off date of 30 June 2021.

The securitised pool is composed of unsecured loans for a share of 56.1% of the portfolio’s GBV and of senior secured loans for a share of 43.3% of the portfolio’s GBV. Remaining exposures are junior secured loans (0.6% of the portfolio’s GBV). Loans were granted mainly to corporate debtors (83.8% of the GBV). Secured loans are backed by first lien mortgages on residential and non-residential properties (25.4% and 74.6% of the total property value, respectively). Properties are rather concentrated in the south of Italy (58.7%) followed by northern (30.8%), and central (10.5%) regions. Asset information reflects aggregation by loans and Scope’s pool adjustments related to collections and sold properties since the cut-off date.

The 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 2.5%. Class B will pay a floating rate indexed to six-month Euribor, plus a margin of 7.5%. The Euribor component of class B interest is subordinated to repayment of class A notes. Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes.

Rating rationale

The rating is 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 rating is 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 rating also addresses 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.

Key rating drivers

High share of drive-by and recent valuations (positive). Half of the portfolio’s collateral appraisals are drive-by valuations (50.1%), which are generally more accurate than desktop or CTU valuations. Around 72.6% of valuations were conducted between end-2021 and 2022, meaning asset values are likely to incorporate the current liquidity risks and recent price fluctuations of the real estate market.¹

High volume of collections since cut-off date (positive). Collections received since portfolio cut-off date up to January 2022 amount to around EUR 11m, which represents around 13% of Scope’s expected lifetime collections. They will be part of the issuer’s available proceeds at the first payment date. These collections will not be considered for the calculation of the servicing fees.^1,2

Material portion of proceedings in advanced stages (positive). Based on our analysis, around 21.2% of the secured loans are in the auction phase and 18.8% in the court distribution phase. These loans have shorter expected time for collections compared with loans in the initial phases of legal proceedings.¹

Underperformance events linked to servicer’s performance (positive). If servicer’s performance falls below its own business plan, its fees are partially subordinated and deferred to the class A payments. This strengthens the alignment of interest between the transaction’s counterparties.²

Below-average collateralisation (negative). A significant share of the portfolio (81.2% of the secured loans) has a loan-to-value higher than 125%. As a result, the liquidation of the real estate collateral will likely be insufficient to cover the full amount of the secured loans.¹

Property type (negative). The residential component of the portfolio (25.4% of total first-lien properties’ valuation) is relatively low compared to peer transactions rated by Scope. The share of hotel, land and properties under construction is high compared to peer transactions (overall 31.5% of first-lien property valuations). These types of real estate assets have higher price volatility compared to residential assets.¹

Geographic concentration (negative). A material portion of the portfolio’s first-lien collateral is concentrated in the south of Italy (58.7% by GBV). Southern regions are less economically dynamic and have generally less efficient tribunals compared to northern regions.¹

Significant portion of unsecured loans (negative). The securitised portfolio has an above average share of unsecured loans, for which recovery rates are typically lower compared to secured loans.¹

Rating-change drivers

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 rating, enhancing transaction’s performance on collection volumes.

Servicer underperformance (downside). Servicer performance falling short of Scope’s expected collection amounts could negatively impact the rating.

Legal costs (downside). An increase of the legal expenses compared to Scope’s initial assumption could negatively affect 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. 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 also considered historical data provided by the servicer. Scope considered that unsecured and junior secured borrowers were classified as defaulted for a weighted average of 4.5 years since cut-off date. 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 17.7% over a weighted average life of 5.1 years. By segment, Scope assumed a gross recovery rate of 26.6% for the senior secured portfolio and 10.8% for the unsecured and junior secured portfolio.

Scope has applied an average combined security value haircut of 51.2%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 43.6% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (13.4% 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 haircut of 15% on the expected recovery rate of the 10 largest borrowers in the class A analysis.

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 rating 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 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 notches.

Rating driver references
1. Loan-by-loan data tape of the securitised pool (confidential)
2. Transaction’s documents (confidential)

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 the relevant asset assumption, 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 (Non-Performing Loan ABS Rating Methodology, 6 August 2021; General Structured Finance Rating Methodology, 17 December 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating is (Cash Flow Model v1.1.), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.

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 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 due diligence assessment/asset audit. The external due diligence/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 is 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: Leonardo Scavo, Senior Analyst.
Person responsible for approval of the Credit Rating: David Bergman, Manging Director.
The Credit Rating was first released by Scope Ratings on 19 April 2022.

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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