Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005316275), EUR 63.4m outstanding: downgraded to CC_SF from B-_SF

Class B (ISIN IT0005316283), EUR 10.1m outstanding: affirmed at C_SF

Class J (ISIN IT0005316291), EUR 13.5m outstanding: not rated

The review performed by Scope Ratings GmbH (Scope) was based on investor and payment reports up to and including the October 2021 payment date along with the servicer reports up to April 2021.

Transaction overview

Popolare Bari NPLs 2017 S.r.l. is a static cash securitisation of secured and unsecured non-performing loans (NPLs), originally accounting for 56% and 44% of the EUR 319.7m gross book value at closing. The loans were mostly extended to companies (88.9%). Prelios Credit Servicing S.p.A. is the special servicer. The loans were originated by Banca Popolare di Bari S.c.p.a. and Cassa di Risparmio di Orvieto S.p.A., which both currently belong to the Mediocredito Centrale banking group. The transaction closed on 5 December 2017 and the legal maturity of the notes is October 2037.

As of 30 September 2021, aggregate net collections were EUR 26.2m, which is only 46.0% of the original business plan’s net expectations of EUR 57.0m. Total available gross collections are split between discounted pay-off proceeds (39.6%), note sales proceeds (27.4%), judicial proceeds (26.0%) and other sources of collections (7.0%).

Approximately 64.4% of gross collections (EUR 17.6m) are from closed borrowers, which represents 10.3% of all borrowers by the portfolio’s gross book value at closing. The majority of closed debtors’ gross collections are split between discounted pay-off proceeds (56.7%) and note sales (39.9%). Based on the last loan by loan provided, 136 properties (21% of the properties at closing) have been sold with an average discount rate of 56%, considerably above the initial Scope assumptions.

The class A notional balance has amortised 21.7% since closing. On the last payment date, in October 2021, there were not enough available funds to amortise any principal of class A due to the low amount of recoveries in that collection period (EUR 0.4m).

The servicer revises the business plan on an annual basis. The last business plan (2021) reports expected gross recoveries 20.7% lower than the original business plan and with almost one additional year of weighted average life. Furthermore, the expected gross recoveries between October 2021 and the final maturity are almost equal to the class A notes’ current outstanding balance (EUR 63.4m).

The present value cumulative profitability ratio (net present value ratio), computed for closed positions, stands at 89.8%, while the cumulative collection ratio stands at 46.0%. Class B interest is subordinated to the payment of class A principal only if the net present value ratio falls below 90%. Most Italian GACS NPL transactions also include a class B interest subordination trigger on the cumulative collection ratio, which better protects senior noteholders if the pace of collections falls behind the original business plan.

The cash reserve was utilised at the last interest payment date to pay the GACS fees and it stands at 73.5% of the target level. Based on the last semiannual servicer report (April 2022), Scope believes that the collections will be enough to replenish the cash reserve at its target level at the next payment date.

Rating rationale

The rating action is driven by the observed and expected performance of the transaction, as well as Scope’s updated modelling assumptions, which reflect the transaction’s performance as well as current and developing macro-economic factors. Scope also compared the transaction’s performance to its own recovery assumptions, considering updated views on asset resolution timing, recovery estimates and macro-economic fundamentals, all developed through transaction-specific observations and benchmarking.

Relevant transaction counterparties are: i) Prelios Credit Servicing S.p.A., the special servicer and master servicer; ii) BNP Paribas Securities Services, Milan Branch, account bank, agent bank, cash manager and principal paying agent; and iii) JP Morgan AG as interest rate cap provider. The rating incorporates the issuer’s exposure to key counterparties.

Key rating drivers

Senior notes’ liquidity protection (positive)¹: A cash reserve is available to cover the senior costs and the interest on the class A notes, providing liquidity protection to senior noteholders. The balance of the cash reserve is currently equal to EUR 1.9m, 3.0% of the class A notes’ principal amount after the October 2021 payment date. Based on Scope’s analysis, the current reserve level covers around 12 months of senior costs and class A interest.

Cumulative collections versus Scope’s expectations (negative)¹: Observed cumulative gross collections are only 21.5% of Scope’s B rating scenario at closing. The transaction’s underperformance is increasing the issuer’s senior costs (e.g. the GACS fee) as the class A notes are amortising more slowly than initially expected. Higher lifetime senior costs will reduce the funds available to repay the class A principal over time.

Below-average pace of closing debtors and weak subordination trigger (negative)¹: The servicer’s pace of closing borrowers is slower than the average for peer transactions. However, the class B interest subordination trigger is not linked to the cumulative collection ratio, which reflects the pace of collections compared to the initial business plan. As a result, even if the payment of class B interests was discontinued starting from the April 2021 interest payment date, the net present value ratio, which is only calculated on closed borrowers, stands at 89.9% very close to the 90% threshold to which the payment of class B interest is linked.

Rating-change drivers

Positive. Significantly improved servicer performance in terms of recovery timing and the total amount of collections could positively impact the ratings.

Negative. A further deterioration in the transaction’s performance could negatively impact the ratings.

Quantitative analysis and assumptions

Scope analysed cash flows reflecting the transaction’s structural features in order 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 33.7% gross recovery rate over a weighted average life of 4.8 years for the class A analysis and a 34.3% gross recovery rate over a weighted average life of 4.8 years for the 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 the class A notes change compared to the assigned rating in the event of:

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

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

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

Rating driver references
1. Transaction documents and reporting (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 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 this Credit Rating, (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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating is (Cash Flow SF EL Model version 1.1), 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 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: Davide Nesa, Director
Person responsible for approval of the Credit Rating: David Bergman, Managing Director
The Credit Ratings was first released by Scope Ratings on 5 December 2017. The Credit Ratings were last updated on 8 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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