Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005356925): EUR 388.4m: downgraded to BB_SF from BBB-_SF

Class B (ISIN IT0005356933): EUR 60.1m: affirmed at B- _SF

Class J (ISIN IT0005356941): EUR 20.0m: not rated

Scope’s review was based on servicer, investor and payment reporting as of the January 2022 payment date.

Transaction overview

BCC NPLs 2018-2 S.r.l. is a static cash securitisation of secured and unsecured NPLs, accounting for 58.4% and 41.6% in terms of original gross book value (“GBV”). The loans were mostly extended to companies (79.1%). The transaction was closed on 20 December 2018 and the legal maturity is in July 2042.

As of December 2021, cumulative gross collections were EUR 168.8m versus original business plan expectations of EUR 196.9m.

Total available gross collections are split between judicial proceeds (57.4%), DPO proceeds (20.7%), note sales proceeds (10.2%), and other type of collections (11.7%).

Around 83% of gross collections (EUR 139.8m) stem from open debtors, for which the recovery process is still ongoing. Remaining collections (EUR 29.1m) stem from closed borrowers (348) with a GBV of EUR 73.9m. Closed borrowers’ collections are split between DPO proceeds (58.3%), note sales proceeds (31.4%), judicial proceeds (9.0%), and other types of collection (1.3%).

The NPV Cumulative Profitability Ratio, computed for closed positions, stands at 109.5%, while the Cumulative Collection Ratio stands at 83%. No interest subordination event occurred in the last interest payment date.

Around 19% of the class A notes’ notional has amortised since closing.

Rating rationale

The rating action is driven by the observed and expected performance of the transaction. Profitability of closed borrowers is materially below Scope B case assumptions and the pace of collections is slow. Scope has updated its modelling assumptions, which reflect transaction performance as well as the current and developing macro-economic factors. Scope compared the transaction’s performance with its recovery assumptions at closing, incorporating also benchmarking considerations.

The ratings consider the issuer’s exposure to key counterparties.

Key rating drivers

Senior notes’ liquidity protection (positive)¹: A cash reserve is available to cover senior fees and interest on class A notes, providing liquidity protection to senior noteholders. It currently stands at EUR 12.5m, 3.2% of class A notes’ principal amount after the January 2022 payment date.

Closed debtors profitability by Scope (negative)¹: Profitability on closed borrowers stands at 77.6% relative to Scope original B case assumptions. Since 2019, Scope observed a downward trend of the profitability.

Below average pace of closing debtors (negative)¹: Servicer’s pace of closing borrowers is slower than the average of peer transactions.

Inflation induced economic slowdown (negative)²: High inflation on the back of soaring energy and commodity prices combined with tighter monetary policy could see recession risk increase substantially. Thus, deteriorated liquidity conditions could reduce the servicer’s performance on collections. Scope has recently reduced its growth projections for Italian economy in 2022 from 4.5% to 4.1%.

Rating-change drivers

Positive. Improved profitability and faster than expected collections from out-of-court resolution strategies could positively impact the ratings.

Negative. Legal costs higher than Scope estimate, may negatively impact the ratings eroding the net available proceeds to repay the notes.

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. Scope assumed a 26.0% gross recovery rate over a weighted average life of 3.9 years for class A analysis, and a 28.6% gross recovery rate over a weighted average life of 3.5 years for class B analysis.

Sensitivity analysis

Scope tested the resilience of the ratings 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 would change compared to the assigned rating in the event of:

• 10% haircut to recoveries, minus three notches;
   
• a one-year recovery lag increase, minus two notches.

The following shows how the results for class B notes change compared to the assigned rating in the event of:

•  10% haircut to recoveries, minus two notches;
   
• a one-year recovery lag increase, minus one notch.

Rating driver references
1. Transaction documents and reporting (Confidential)
2. Scope research

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 assumptions, 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, 6 August 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021; General Structured Finance Rating Methodology, 17 December 2021), are available on https://www.scoperatings.com/ratings-and-research/structured-finance/methodologies.
The model used for these Credit Ratings is (Cash Flow SF EL Model Version 1.1), available in Scope Ratings’ list of models, published under https://www.scoperatings.com/ratings-and-research/structured-finance/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/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 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 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/asset audit at closing. The external due diligence assessment/asset audit 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 Credit Ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 20 December 2018. The Credit Ratings were last updated on 25 May 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
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.